*51 Decision will be entered under Rule 50.
1. Petitioner was chartered as a mutual fire insurance company under the laws of Pennsylvania in 1938. It had no stock or stockholders. Its only members were its policyholders, who were entitled to one vote for each policy. Its officers and directors were chosen from and by its members. Standard premium rates were charged to policyholders, who were also liable for assessments if funds on hand became insufficient to meet losses and expenses. No nonassessable policies were issued. It employed a partnership to act as underwriting manager, for which service and for certain expenses borne by the partnership it paid the partnership 47 percent of the gross premiums collected. Held, petitioner was a mutual insurance company, but it was not writing insurance substantially at cost and is not exempt under section 101 (11) of the Internal Revenue Code.
2. Under the facts stated above petitioner was a mutual insurance company other than life, and it is entitled to be taxed under the provisions of section 207 of the Internal Revenue Code, but, since the Commissioner has allowed to petitioner as deductions for 1939 and 1940 all losses and expenses*52 attributable to its business in those years, petitioner is not entitled under the provisions of section 207 (c) (3) of the code to an additional deduction of certain sums which it claimed on its income tax returns filed for those years as "premium deposit retained for the payment of losses and expenses." Under the facts in evidence, to grant such deduction would be to grant a double deduction, which is not permissible under the applicable statute and regulations.
*75 This proceeding involves the determination by the respondent against petitioner of deficiencies in income tax for the calendar years 1939 and 1940 of $ 266.46 and $ 1,945.17, respectively; of a 25 percent penalty of $ 66.61 for failure to file the 1939 return within the time prescribed; and of a deficiency in excess profits tax for the year 1940 in the amount of $ 1,380.67.
*76 The principal issue is whether petitioner is exempt from taxation under section 101 (11) of the Internal Revenue Code. As an alternative petitioner contends that if it is not so exempt it is taxable under the provisions*53 of section 207 of the code as a mutual insurance company other than life and is entitled to the special deduction provided for under section 207 (c) (3), and that in either event there would be no tax due for either year. 1
FINDINGS OF FACT.
Petitioner is a corporation, with its principal office in Philadelphia, Pennsylvania. The returns for the periods here involved were filed with the collector for the first district of Pennsylvania at Philadelphia.
Petitioner*54 was incorporated under the laws of the Commonwealth of Pennsylvania under a charter granted September 23, 1938. The incorporation was authorized under the provisions of the Act of the General Assembly of the Commonwealth approved May 17, 1921, P. L. 682. The material provisions of petitioner's charter (also called articles of agreement) are as follows:
Know all Men by these presents:
We, the undersigned, citizens of the Commonwealth of Pennsylvania, do hereby associate to form an incorporated company for the purpose of transacting the business of fire insurance in accordance with the provisions of an Act of the General Assembly of the Commonwealth of Pennsylvania, entitled "An act relating to insurance * * *" approved the seventeenth day of May, A. D. 1921, and for that purpose do make and sign these as our Articles of Agreement:
1st. The name by which the company shall be known is Safeguard Mutual Fire Insurance Company
2nd. The class of insurance for which the company is constituted is Clause B Paragraph 2&E as provided for in Section 202 of the above recited Act, viz: For making insurances
Upon automobiles whether stationary or in operation or in transit, against loss or*55 damage by fire, explosion, transportation, collision, or by burglary, larceny, or theft, or fraudulent conversion; not including, in any case, insurances against loss by reason of bodily injury to the person; and to effect reinsurance of any risk provided in this clause.
3rd. The plan or principle on which the business is to be conducted is the mutual plan or principle.
4th. The place in which the company is to be established or located is Philadelphia.
5th. The general objects of the Company are to make insurances on the Mutual Principle against loss as provided in Clause B, Paragraph 2&E, Section 202, of the above recited Act.
*77 6th. The proposed duration of the Company is perpetual.
7th. The powers which the Company proposes to have and exercise are: To have succession as hereinbefore provided; to adopt and have a common seal; and the same to alter at pleasure; to sue and be sued; and, in general, to exercise the powers of a corporate body, and make such contracts as may be necessary to carry out the objects of fire insurance on the plan provided for in this agreement; to purchase or lease such real estate as may be necessary for a place of business, and for the security*56 of investments; and to adopt such by-laws as may from time to time be deemed necessary.
8th. The subscribers to these articles of agreement have chosen from their number a President, a Secretary, a Treasurer, and a Board of seven Directors, who shall continue in office until the first annual meeting of the members, and until their successors are duly chosen and qualified, and whose names and residences are as follows: * * *
The bylaws of petitioner were adopted at the first meeting of the members of petitioner held on October 14, 1938, and consisted of ten separately numbered articles. "Article I -- Members" provided that all persons insured in the company shall be members during the time specified in their policies and no longer. "Article II -- Meetings" provided that 30 days' notice shall be given of the time and place of the annual meeting; that special meetings could be called; that "Each member who shall have paid all his premiums and assessments which are due shall have one vote for each policy issued to him"; that "Absent members may vote by proxies dated and executed within thirty days, and deposited and recorded with the Secretary at least two days previous to the meeting*57 at which they are to be used"; and that "At all meetings of the Company, ten members shall constitute a quorum for the transaction of business; but a lesser number may adjourn from day to day until a quorum is obtained." "Article III -- Directors," clause 1, provided for seven directors to be chosen from among the members of the Company. Clause 2 of article III provided:
2. The Directors shall have entire charge of the property, interest, business and transactions of the Company, with full power and authority to manage and conduct the same and to fix compensation of officers, directors, and for other services to the Company; and shall serve until the election and acceptance of their duly qualified successors. Any vacancies may be filled by the remaining Board for the unexpired term of such vacancy or vacancies.
"Article IV -- Officers" specifies the duties of each officer and provides for their election by the board of directors. The material provisions of "Article V -- Dividends and Assessments" are as follows:
Dividends shall be declared and assessments shall be levied in accordance with the business of the Company.
1. (Dividends) -- Dividends out of the profits of the business*58 may be declared by the Board of Directors in their absolute discretion at their regular meeting in February, and shall apply only to such policies as have terminated in the previous year ending December 31st; which dividends may be paid in cash, or, at the option of the Board of Directors, scrip certificates may be issued, redeemable at the pleasure of the Company.
*78 2. (Assessments) -- If during any fiscal year the losses upon the business and risks during that year exceed the premiums on the policies of insurance in force during that year, the President and Directors shall cause an assessment to be levied, ratably, upon all policies of insurance in force during that year, in proportion to the annual premiums thereon, for an amount adequate to meet the deficiency, and such assessment shall be due and payable within ten (10) days from the date of notice thereof, provided that no policyholder shall be liable to be assessed more than the amount of his annual cash premium in addition to such annual cash premium already paid.
"Article VI -- Reserve Fund" provides:
The Board of Directors shall have authority to create a Reserve Fund, and at their regular meeting in February shall*59 determine what per cent., if any, of the net earnings of the previous year shall be placed in the Reserve Fund. Such Reserve Fund shall be under the control of the Board of Directors and may be used, at their discretion, for the payment of losses or redemption of the Company's scrip certificates or other obligations of the Company or such other purpose as may appear advisable in the discretion of the Board of Directors.
Article VII dealt with attorneys in fact, and article VIII provided for the complete method and procedure for levying assessments. No nonassessable policies could be issued. Article IX dealt with the execution of company obligations, and article X provided for the manner in which the bylaws could be amended.
All policies issued by petitioner are issued on a standard form, a copy of which is attached to the stipulation of facts as Exhibit 3-C. Among other covenants this standard form contained the following:
Mutual Policy Conditions
This Policy is issued by a mutual company having special regulations lawfully applicable to its organization, membership, policies or contracts of insurance of which the following shall apply to and form a part of this Policy: [Immediately*60 following is a printing in full of article VIII of petitioner's bylaws relating to the complete method and procedure for levying assessments.]
The rates charged by petitioner were standard rates for the type of automobile covered by the policy.
Petitioner had no stockholders and issued no stock certificates to any persons.
During the years under consideration all income and receipts were from premiums received from members on their policies of insurance and from no other source. The earned receipts from premiums were $ 123,049.32 for the year 1939, and $ 188,249.05 for the year 1940, and these amounts were reported by petitioner as gross receipts from premiums on its income tax return for the taxable years 1939 and 1940, respectively.
For each of the years ended December 31, 1938, 1939, and 1940, petitioner filed with the Insurance Commissioner of the Commonwealth of Pennsylvania an "annual statement" showing in the first roman numbered parts of each statement for each year the following: *79
| 1938 | 1939 | |
| I -- Guaranty Capital: | ||
| Ledger assets as of Dec. 31, of previous year | $ 39,450.33 | |
| Guaranty capital paid in during the year | $ 15,000.00 | |
| II -- Income: | ||
| Net premiums | 44,893.54 | 147,343.73 |
| Income from other sources | 9.71 | |
| Total | 59,893.54 | 186,803.77 |
| III -- Disbursements: | ||
| Paid for losses (net) | 1,126.58 | 21,703.01 |
| Loss adjustment expenses | 3,177.05 | |
| Agents' compensation | 18,271.42 | 66,885.10 |
| Salaries and fees | 552.84 | 3,205.56 |
| Rents | 20.00 | 120.00 |
| Office maintenance and expense | 93.27 | 697.78 |
| Taxes | 129.10 | 133.05 |
| Legal expenses | 250.00 | |
| Miscellaneous | 384.40 | |
| Interest on guaranty fund | ||
| Employees' social-security taxes | ||
| Total disbursements | 20,443.21 | 96,305.95 |
| Balance | 39,450.33 | 90,497.82 |
| 1940 | |
| I -- Guaranty Capital: | |
| Ledger assets as of Dec. 31, of previous year | $ 90,497.82 |
| Guaranty capital paid in during the year | 12,500.00 |
| II -- Income: | |
| Net premiums | 159,825.29 |
| Income from other sources | 14.32 |
| Total | 262,837.43 |
| III -- Disbursements: | |
| Paid for losses (net) | 28,990.47 |
| Loss adjustment expenses | 12,812.21 |
| Agents' compensation | 88,763.48 |
| Salaries and fees | 3,710.96 |
| Rents | 120.00 |
| Office maintenance and expense | 1,111.19 |
| Taxes | 217.12 |
| Legal expenses | |
| Miscellaneous | 453.23 |
| Interest on guaranty fund | 2,391.89 |
| Employees' social-security taxes | 9.71 |
| Total disbursements | 138,580.26 |
| Balance | 124,257.17 |
The fourth and fifth roman numbered parts of each respective statement reported the assets and liabilities of petitioner as of the close of each year as follows:
| 1938 | 1939 | |
| IV -- Ledger Assets: | ||
| Cash deposited in trust companies | $ 29,059.98 | $ 58,950.75 |
| Premium receivables | 10,390.35 | 31,547.07 |
| Total | 39,450.33 | 90,497.82 |
| V -- Liabilities: | ||
| Net unpaid claims | 1,000.00 | 3,800.00 |
| Unearned premiums (reserved) | 38,380.44 | 83,186.68 |
| Interest due or accrued | ||
| Accrued for taxes | 45.11 | |
| Employees payroll taxes | ||
| Guaranty fund or other permanent surplus fund | 69.89 | 3,466.03 |
| Total | 39,450.33 | 90,497.82 |
| 1940 | |
| IV -- Ledger Assets: | |
| Cash deposited in trust companies | $ 93,947.53 |
| Premium receivables | 30,309.64 |
| Total | 124,257.17 |
| V -- Liabilities: | |
| Net unpaid claims | 3,600.00 |
| Unearned premiums (reserved) | 92,990.77 |
| Interest due or accrued | 1,169.86 |
| Accrued for taxes | 35.57 |
| Employees payroll taxes | 14.32 |
| Guaranty fund or other permanent surplus fund | 26,446.65 |
| Total | 124,257.17 |
The net premiums shown in part II above were arrived at on the respective annual statements as follows:
| 1938 | 1939 | 1940 | |
| Gross premiums | $ 45,727.56 | $ 167,855.56 | $ 198,053.14 |
| Less: "Return Premiums and Premium | |||
| Deposits on Policies Canceled" | 834.02 | 20,511.83 | 38,227.85 |
| Net premiums | 44,893.54 | 147,343.73 | 159,825.29 |
The above stipulated amounts of "earned receipts from premiums" were arrived at in the following manner:
| 1939 | 1940 | |
| Gross premiums per annual statement | $ 167,855.56 | $ 198,053.14 |
| Less: Increase in "Unearned premiums | ||
| (Reserve)" shown in part V above | ||
| over the reserve for the previous year | 44,806.24 | 9,804.09 |
| Earned receipts from premiums | 123,049.32 | 188,249.05 |
*80 The amounts paid for*63 losses (net) shown in part III above for the taxable years were arrived at on the respective annual statements as follows:
| 1939 | 1940 | |
| Gross amount paid for losses | $ 23,872.28 | $ 32,314.02 |
| Deduct: Salvage | 2,169.27 | 3,323.55 |
| Paid for losses (net) | 21,703.01 | 28,990.47 |
Petitioner reported gross income and deductions on its Federal income tax returnes for the taxable years 1939 and 1940, as follows:
| 1939 | 1940 | |||
| Gross Income: | ||||
| Gross receipts from premiums | $ 123,049.32 | $ 188,249.05 | ||
| Other income (subrogation | ||||
| losses and/or salvage) | 2,169.27 | 3,323.55 | ||
| Total | 125,218.59 | 191,572.60 | ||
| Deductions: | ||||
| Salaries and wages | 3,205.56 | 3,710.96 | ||
| Rent | 120.00 | 120.00 | ||
| Interest | 3,561.75 | |||
| Taxes | 168.45 | 137.29 | ||
| Other deductions, set out in schedule: | ||||
| Return premiums | 20,511.83 | 38,227.85 | ||
| Losses | 26,672.28 | 32,114.02 | ||
| Commissions | 66,885.10 | 88,763.48 | ||
| Adjustment expense | 3,177.05 | 12,812.21 | ||
| Legal and auditing | 325.00 | 452.50 | ||
| Office expense | 569.40 | 1,111.19 | ||
| Miscellaneous | 160.66 | .73 | ||
| Filing fees | 80.00 | |||
| Premium deposit retained for the | ||||
| payment of losses and expenses | 3,423.26 | 10,480.62 | ||
| Total | 125,218.59 | 191,572.60 | ||
| Net income | None | None |
*64 Attached to the return for the year 1939 was a letter from petitioner to the collector dated August 22, 1940, the body of which was as follows:
Enclosed herewith please find our income tax returns for the years 1938 and 1939. The delay in filing these returns was occasioned by the belief that mutual fire insurance companies were tax exempt. We have just been advised otherwise, and are therefore filing these returns.
The respondent, in determining the deficiencies herein, disallowed the amounts deducted in both years for "premium deposit retained for the payment of losses and expenses" and also determined that $ 1,808.33 of the interest deducted in 1940 was applicable to the year 1939, so that the adjustments to net income as determined by the respondent for the taxable years were as follows:
| Year 1939 | ||
| Net income as disclosed by return | None | |
| Unallowable deductions and additional income: | ||
| (a) Premium deposits retained | $ 3,423.26 | |
| Total | 3,423.26 | |
| Nontaxable income and additional deductions: | ||
| (b) Interest | $ 1,808.83 | |
| Net income adjusted | 1,614.93 | |
| Year 1940 | ||
| Net income as disclosed by return | None | |
| Unallowable deductions and additional income: | ||
| (a) Premium deposits retained | $ 10,480.62 | |
| (b) Interest | 1,808.33 | |
| $ 12,288.95 | ||
| Net income adjusted | 12,288.95 |
*65 *81 The adjustments for "premium deposits retained" were explained by the respondent in a statement attached to the deficiency notice as follows:
The deductions from gross income claimed in your returns for the years 1939 and 1940, under section 207 (c) (3) of the Internal Revenue Code, are disallowed for the reason that your company is not a mutual company within the meaning of the Code.
The interest adjustment was explained as follows:
(b) Deduction for interest payable on certificates of deposit to Guarantee Fund, claimed in the return for 1940, has been held to be applicable to 1939.
Gorson Co. was a partnership composed of Joseph N. Gorson and Cyrus Gorson. As the occasion required, Gorson Co. advanced money to petitioner, for which petitioner on August 8, 1941, issued the following certificate:
$ 15,000.00
The Safeguard Mutual Fire Insurance Company of Philadelphia.
Incorporated under the Laws of the Commonwealth of Pennsylvania
Certificate of Deposit to Guarantee Fund Non-Assessable
This Is To Certify That Gorson Company has this day deposited with The Safeguard Mutual Fire Insurance Company of Philadelphia, Pennsylvania, a Company duly organized and existing under the*66 Laws of the Commonwealth of Pennsylvania, the sum of Fifteen Thousand Dollars ($ 15,000.00) as part of a Guarantee Fund of said Company. Said deposit shall be repaid out of the surplus earnings of this Company at such times and in such amounts as the Board of Directors may determine. This certificate shall bear interest at the rate of six percent per annum (6%), payable annually on February 1st in each year, each year's interest to be calculated to December 31st previous.
In Witness Whereof, The Safeguard Mutual Fire Insurance Company of Philadelphia has caused this Certificate to be signed by its President and Secretary and sealed with its Corporate Seal this the 8th day of August, 1941.
[Signed] Joseph Sharfsin,
Joseph Sharfsin, President.
[Signed]
Florence B. McIntyre.
Florence B. McIntyre, Secretary.
(seal)
*82 The partners of Gorson Co. were controlling stockholders in the General Finance Corporation, a corporation engaged in the financing of new and used automobiles. The majority of owners' automobiles financed by such company were insured by petitioner against fire and theft. There were few renewals of policies with petitioner after the repayment of loans*67 to the General Finance Co.
At the annual meeting held on May 1, 1939, Joseph N. Gorson cast 158 member votes by proxy and 7 votes were cast by members present. At the annual meeting held on April 29, 1940, Joseph N. Gorson cast by proxy 312 votes and 6 votes were cast by members present.
On April 29, 1940, an agreement was entered into between petitioner as the "company" and Gorson Co. whereby the latter partnership was appointed "Underwriting Manager," and for this service it was to be paid 47 percent of the gross premiums written by petitioner, whether written by local agents or by Gorson Co. Among other things the agreement also provided:
7. The Company shall and will not be responsible for expenses of the Underwriting Manager, including rental for Underwriting Manager offices occupied by it in Philadelphia, expenses of travelling from place to place in the supervision of the local agents, if any, clerk hire, postage and advertising.
8. The said Underwriting Manager shall and will have power and authority to appoint such local agents as in its discretion may be desirable, and grant the said local agents, consisting of individuals, copartnerships or corporations, authority in *68 writing, to solicit risks and collect premiums and to issue and countersign policies for and on behalf of the Company; Provided, However, the commissions due and to be paid to such local agents for the placing and procuring of the insurance, shall be paid by the Underwriting Manager out of its compensation as is hereinabove fixed.
* * * *
13. It is further understood and agreed that the good-will value of the agency plant hereby created shall be and remain the property of the Underwriting Manager upon the cancellation or termination of this agreement, and upon the termination of this agreement or any extension or renewal thereof all dailies, expirations, records, books, accounts, paper and documents used by the Underwriting Manager in connection with the agency hereby created shall be and remain the property of the Underwriting Manager, * * *
All of the disbursements made by petitioner have been made to pay losses and expenses. Included in the expenses paid are the items marked "commissions," which include compensation paid under the terms of the above mentioned agreement with Gorson Co.
Petitioner did not at any time pay dividends to policyholders during the taxable years 1939 and*69 1940. No assessments were made against policyholders in 1939 when there was a deficit from 1938.
Any part of the stipulation of facts, including the exhibits thereto, not specifically set forth herein is incorporated herein by reference and made a part of these findings of fact.
*83 OPINION.
As previously stated, the principal issue is whether petitioner is exempt from taxation under section 101 (11) of the Internal Revenue Code. 2
In its income tax returns for the taxable years petitioner did not claim to be an exempt corporation under section 101 (11) of the Internal Revenue Code. Its claim was that it was a mutual insurance company other *70 than life and was taxable under the provisions of section 207, and that under section 207 (c) (3) it is entitled to a special deduction of "premium deposits retained for the payment of losses and expenses." The Commissioner in his determination of the deficiencies disallowed these claimed deductions on the ground, as stated in his deficiency notice, that "Your company is not a mutual company within the meaning of the Code."
The petitioner's principal contention now is that it is entirely exempt from taxation under section 101 (11) of the Internal Revenue Code. This change in ground on the part of petitioner from that taken in its original income tax returns is permissible, and the Commissioner makes no contention to the contrary. If we should hold that it is not exempt from taxation under section 101 (11) of the code, petitioner contends in the alternative that it is taxable under section 207 and is entitled to the special deduction provided for under section 207 (c) (3). 3
*71 Petitioner must meet a twofold test if it is to gain exemption under section 101 (11). "Not only must it be a mutual company but its income must be used or held solely for the payment of losses or expenses." Driscoll v. Washington County Fire Ins. Co., 110 Fed. (2d) 485, 488. The respondent contends that petitioner meets neither test and relies *84 principally upon Mutual Fire Insurance Co. of Germantown v. United States, 142 Fed. (2d) 344, and Keystone Mutual Casualty Co. v. Driscoll, 137 Fed. (2d) 907, affirming 44 Fed. Supp. 658.
In deciding the issues here involved we must look to the general law rather than to the local law of Pennsylvania. Mutual Fire Insurance Co. of Germantown v. United States, supra.
We think that petitioner was a mutual insurance company other than life as that term has been interpreted and construed by the Board of Tax Appeals and the courts. It is true that it wrote its policies of insurance at the flat rate used by the stock companies and thus charged a regular cash premium, but this fact did not destroy its*72 character as a mutual company. See Ohio Farmers Indemnity Co., 36 B. T. A. 1152; affd., 108 Fed. (2d) 665. In this case, among other things, we said: "A mutual insurance company issuing policies providing for the payment of a cash premium does not lose its identity as a mutual company." (Citing cases.)
In the instant case each policyholder was a member of the corporation and was entitled to one vote for each policy of insurance taken out in the company. No one else had a right to vote except policyholders, though they could and did vote by proxy. There were no stockholders. Petitioner was organized as a mutual insurance company under the laws of the State of Pennsylvania. We think all these facts, taken together, fix petitioner's character as a mutual corporation, so we do not agree with the Commissioner's contention that petitioner is not a mutual company.
But every mutual insurance company is not exempt from taxation under the provisions of section 101 (11) of the Internal Revenue Code. By the plain provisions of that section farmers' or other mutual hail, cyclone, casualty, or fire insurance companies or associations*73 are exempt only where "the income of which is used or held for the purpose of paying losses or expenses." And it is here where petitioner fails to qualify as an exempt corporation. We think that the facts of the instant case cause it to fall within the ambit of Mutual Fire Insurance Co. of Germantown v. United States, supra, and Keystone Mutual Casualty Co. v. Driscoll, supra, both of which are strongly urged by the Commissioner in support of his determination.
In Mutual Fire Insurance Co. of Germantown the court reviewed several prior decisions of that circuit which dealt with the same issue involving exemption under the same statute, and it pointed out that one of the essential elements necessary for a mutual fire insurance company to secure tax exemption under section 101 (11) is that it write insurance at cost to its members. The court summed up its conclusion in that respect as follows:
*85 It will thus be seen that this court has consistently adhered to the view that one of the essential characteristics of a mutual insurance company is that it provide insurance to its members substantially at cost.
The court then pointed*74 out the following facts upon which, among others, it based its conclusion that the taxpayer was not writing insurance at cost:
* * * It charges the same rates as do the stock companies and pays the same brokers' commissions. It does not sell insurance at reduced rates or give rebates to its policyholders. The taxpayer has at no time made any assessments against its policyholders. Except in the year 1873 when it issued scrip for $ 36,377.43 the taxpayer has made no distribution by way of dividends of profits [ILLEGIBLE WORD] savings or redundancy payments to its policyholders. * * *
After reciting these and other facts which were present in that proceeding, the court held that the taxpayer was not an exempt corporation under section 101 (11).
In the instant case, as we have already pointed out, the taxpayer collected from its policyholders insurance premiums at the regular standard rates charged by stock companies writing the same sort of insurance in the State of Pennsylvania. It paid 47 percent of all premiums collected to its underwriting manager, Gorson Bros., for their services. Neither its charter nor its bylaws provided definitely for rebates to policyholders. Article*75 V of the bylaws provided that the directors might, within their discretion, declare dividends out of profits, and among other things, that:
* * * Dividends out of the profits of the business may be declared by the Board of Directors in their absolute discretion at their regular meeting in February, and shall apply only to such policies as have terminated in the previous year ending December 31st; * * * [Italics supplied.]
No dividends were declared to policyholders and no other kind of redundancy payments were made to them in either of the taxable years. It is doubtless true, as the petitioner contends, that there were good reasons why the directors did not, in the exercise of their discretion, declare and pay dividends to policyholders in either of the taxable years, these reasons being that the taxpayer was indebted to the Gorson Co. for borrowed guarantee funds in amounts in excess of the surplus premium deposits received in those years. It seems reasonable to assume, however, that the reason why petitioner had to borrow guarantee funds, especially the amount borrowed in 1940, despite the very large amounts of premiums which it collected from its policyholders in 1939 and*76 1940 was the 47 percent of each premium collected which it had to pay to its underwriting manager, the Gorson Co., under the terms of its contract. Nearly half of every dollar that petitioner collected from its policyholders went to its underwriting manager. The reasonableness of these payments is not in issue so far *86 as deductions from gross income are concerned, because the Commissioner has allowed them in full as deductible expenses in his determination of the deficiencies. However, it is not inappropriate that we consider them along with other facts in the record in determining whether petitioner was writing insurance at cost and is an exempt corporation under section 101 (11). As said by the District Court in Keystone Mutual Casualty Co. v. Driscoll, supra:
* * * The consensus of the opinions is that the section contemplates an association of individuals whose sole object is to obtain insurance for themselves at cost, and, if amounts greater than necessary cost had been collected, that excess was to be returned to members in some form. The maintenance of a reasonable reserve is not prohibited, but it must be for the one purpose *77 of paying losses and expenses, with ultimate return of excess to members. In other words, the association is for the benefit of the members, and not the members for the benefit of the association.
The above language was quoted and approved by the Circuit Court of Appeals for the Third Circuit in its affirmance of the District Court below. See Keystone Mutual Casualty Co. v. Driscoll, supra.
If the 47 percent commission which petitioner paid to its underwriting manager, the Gorson Co., was the ordinary and usual commission paid by insurance companies writing similar policies for similar services, then it was petitioner's burden of proof to show that fact, in view of the issue drawn as to exemption from taxation. This it has not done. We think this is an important factor in determining whether petitioner was writing insurance for its members substantially at cost. Certainly a mutual insurance company claiming exemption under section 101 (11) can not pay excessive commissions to its underwriting agent which is closely connected with its organization and operation and then claim that it is writing insurance substantially at cost to its members and*78 is exempt under section 101 (11). We think that to construe the statute as affording exemption from taxation in such a case would be to distort its meaning. Cf. American Insurance Co. of Texas v. Thomas, Fed. Supp. (Feb. 21, 1944).
So, without further recitation of the facts present in the instant case, which are set forth fully in our findings, we hold that petitioner falls within the ambit of Mutual Fire Insurance Company of Germantown v. United States, supra, and Keystone Mutual Casualty Co. v. Driscoll, supra, and is not an exempt corporation under section 101 (11) of the Internal Revenue Code.
This brings us to petitioner's alternative contention, which is that, if we hold that it is not exempt under section 101 (11) of the Internal Revenue Code, nevertheless it is a mutual insurance company other than life within the meaning of section 207 of the code and it should *87 be taxed thereunder and is entitled to have deducted, under the provisions of section 207 (c) (3), the premium deposits retained in 1939 and 1940 which it alleges it retained for the payment of losses and expenses. For reasons which we have already*79 stated, we hold that petitioner was a mutual insurance company other than life, organized as such under the laws of Pennsylvania. It had no stockholders and all policyholders were recognized as members. And, while we do not think petitioner was exempt from taxation under section 101 (11), we are unable to agree with the Commissioner's contention that it is not a mutual company taxable under the provisions of section 207 of the code. We hold that it is so taxable. Having thus held, the question which remains is whether petitioner, in addition to the deductions allowed to corporations by section 23 of the code, is entitled to further deductions of $ 3,423.26 for 1939 and $ 10,480.62 for 1940, under section 207 (c) (3), as premium deposits retained for the payment of losses and expenses.
Section 19.207-6 of Regulations 103 provides in regard to this special deduction, as printed in the margin. 4
*80 By examining the findings of fact it will be seen that the Commissioner, in his determination of the taxable net income of petitioner for the years 1939 and 1940, has allowed petitioner as deductions all the losses and expenses which it claimed for those years. No proof is made that there were other losses and expenses paid or incurred in those years attributable to its underwriting business for those years which were not included in the amounts allowed by the Commissioner as deductions.
The regulations provide that, where all losses and expenses have been allowed as deductions, it is not permissible to allow a further deduction of premium deposits retained to pay any of these losses and expenses, for to do so would be equivalent to allowing a double deduction. See Mutual Fire Insurance Co. of Germantown v. United States, 50 Fed. Supp. 665, affirmed by the Third Circuit, supra. Because petitioner has not shown itself entitled to a deduction under *88 section 207 (c) (3) in addition to those already granted by the Commissioner in his determination of the deficiencies, petitioner's alternative contention is not sustained.
Petitioner has*81 made no contest of the 25 percent delinquency penalty imposed by the Commissioner, if we should sustain the Commissioner in his determination of the deficiency for 1939. Therefore, the question of the penalty is not in issue.
Decision will be entered under Rule 50.
Footnotes
1. If the principal issue is decided for the petitioner, there would be no tax liability or penalty for either year. If the principal issue is decided against petitioner and the alternative contention is sustained, there would be no deficiency in excess profits tax for 1940 and there would be no deficiency in income tax for 1939 and therefore no penalty for 1939, but there would be a small deficiency in income tax for 1940, due to the disallowance of a deduction for interest in the amount of $ 1,808.33, which interest adjustment petitioner has not contested.↩
2. SEC. 101. EXEMPTIONS FROM TAX ON CORPORATIONS.
The following organizations shall be exempt from taxation under this chapter --
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(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.↩
3. SEC. 207. MUTUAL INSURANCE COMPANIES OTHER THAN LIFE.
(a) Imposition of Tax. --
(1) In General. -- There shall be levied, collected, and paid for each taxable year upon the special class net income of every mutual insurance company (other than a life insurance company) a tax equal to 16 1/2 per centum thereof.
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(c) Deductions. -- In addition to the deductions allowed to corporations by section 23 the following deductions to insurance companies shall also be allowed, unless otherwise allowed --
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(3) Mutual insurance companies other than life and marine. -- In the case of mutual insurance companies (including interinsurers 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, 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.↩
4. Mutual insurance companies * * *, which require their members to make premium deposits to provide for losses and expenses, are allowed to deduct from gross income the aggregate amount of premium deposits returned to their policyholders or retained for the payment of losses, expenses, and reinsurance reserves. In determining the amount of premium deposits retained by a mutual fire or mutual casualty insurance company for the payment of losses, expenses, and reinsurance reserves, it will be presumed that losses and expenses have been paid out of earnings and profits other than premiums to the extent of such earnings and profits. If, however, any portion of such amount is applied during the taxable year to the payment of losses, expenses, or reinsurance reserves, for which a separate allowance is taken, then such portion is not deductible; and if any portion of such amount for which an allowance is taken is subsequently applied to the payment of expenses, losses, or reinsurance reserves, then such payment cannot be separately deducted. The amount of premium deposits retained for the payment of expenses and losses, and the amount of such expenses and losses, may not both be deducted↩. * * * [Emphasis supplied.]