*64 Decisions will be entered under Rule 50.
1. Petitioners, fire insurance companies incorporated under the laws of New Hampshire and doing business in that state, reinsured a portion of their risks in companies not admitted to do business in New Hampshire. In making the annual report of their operations and condition to the Insurance Commissioner of the State of New Hampshire, petitioners used the Convention Form as required by the Insurance Commissioner and as accepted and followed uniformly throughout the United States. The Convention Form does not recognize transactions with unadmitted companies, nor does the Insurance Commissioner permit petitioners to deviate from such practice. Held, under the provisions of section 204 (b)(1) of the Revenue Acts of 1936 and 1938, practically identical with section 246 (b)(1) of the Revenue Act of 1921, the first statute to create new legislation relating to insurance companies other than fire or mutual, petitioners' income tax returns must be based on the Convention Form and their income taxes computed on the basis of transactions there reported.
2. Petitioner, New Hampshire, purchased its own stock from its agents at a price higher*65 than market for the purpose of "keeping faith" with such agents and because it considered it good business so to do. It felt under no obligation to pay the excess price. Held, that the excess price over market is not an element of cost in computing cost on subsequent sale.
3. Prior to 1935 petitioner, New Hampshire, charged premiums at rates higher than those approved by the Superintendent of Insurance of Missouri. By court order the excess premiums were impounded. On November 18, 1935, petitioner was notified that shortly after December 31, 1935, the court would order a distribution, except as to amounts affected by the intervention of a challenging policyholder, and that other policyholders had the right to intervene on or before December 31, 1935. Petitioner was assured that such intervention did not interfere with the promised distribution which was to be made pursuant to a settlement decree. No policyholder intervened within the time limit, and petitioner was so notified January 14, 1936, or shortly thereafter. Petitioner closed its books after January 14 and before February 4, 1936. It estimated its portion of premiums to be returned and the expenses in connection*66 with their recovery and accrued as income for 1935 the excess of such premiums over expenses. Settlement thereof in full was made in 1936. Held, petitioner properly accrued and reported as income in 1935 the excess of the estimated amount of returned premiums over the estimated expenses incident thereto.
*709 The respondent determined deficiencies in the income taxes of the petitioners as follows:
| Petitioner | Year | Amount |
| New Hampshire Fire Insurance Co | 1936 | $ 12,671.8 |
| 1937 | 4,792.77 | |
| 1938 | 15,813.76 | |
| Granite State Fire Insurance Co | 1936 | 364.41 |
The primary and major issue is whether, in computing their gross income, the petitioners should follow exactly the "underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners" (called the Convention Form), as provided by section 204 (b) of the Revenue Acts of 1936 and 1938 and as required by the insurance commissioners of the several states, or should make certain adjustments under its accepted usage and custom but not recognized by*67 that form. The method approved will affect the computation of unearned premium reserve of salvage and reinsurance recoverable on paid losses from unadmitted companies and of reinsurance recoverable on unpaid losses from unadmitted companies.
A collateral issue is whether or not the Commissioner failed to make proper adjustments relating to items which had formed the basis of tax benefits to the petitioners in prior years.
Additional issues are:
(a) Did the New Hampshire Fire Insurance Co. sustain a loss of $ 1,562.50 upon the purchase and resale of its own capital stock?
(b) Did that company properly accrue income and expenses in 1935 by reason of certain impounded "Missouri-rate" premiums?
*710 The parties have agreed that the income of the New Hampshire Fire Insurance Co. should be increased by $ 9,771.25 as additional dividend income instead of $ 15,316.88 as determined by the Commissioner. Other issues have been waived and abandoned by the petitioners.
FINDINGS OF FACT.
Certain facts are stipulated and as so stipulated are adopted as findings of fact. A portion of such facts material to the issue and relating to the New Hampshire Fire Insurance Co. are as follows:
Stipulated*68 Facts as to New Hampshire Insurance Issues.
The petitioner, New Hampshire Fire Insurance Co., hereinafter called New Hampshire, is a corporation organized under the laws of the State of New Hampshire, with offices in Manchester, New Hampshire, and is an insurance company, other than life or mutual.
The petitioner filed its annual statements for the years involved with the Insurance Commissioner for the State of New Hampshire. Such statements were on the form approved by the National Convention of Insurance Commissioners, hereinafter called the Convention Form.
In each of the years here involved the petitioner, in accordance with accepted practice, reinsured portions of its risks with other companies. Some of such reinsurance was placed with companies which were not authorized to do business in the State of New Hampshire. Hereinafter such companies are referred to as unadmitted companies and such reinsurance is referred to as unauthorized reinsurance.
Year 1936.
On its annual statement, in computing premiums of $ 3,899,460.76, the petitioner deducted return premiums of $ 961,380.77 and reinsurance premiums of $ 960,013.90 from gross premiums of $ 5,820,855.43. Such reinsurance*69 premiums in the amount of $ 960,013.90 included premiums for reinsurance placed by the petitioner with unadmitted companies.
In computing the amount of gross premiums shown on schedules VII and VIII on page 7 of the annual statement the petitioner did not reduce gross premiums by the amount of premiums paid by the petitioner for unauthorized reinsurance, although gross premiums were reduced by the amount of premiums paid by the petitioner for authorized reinsurance. Because gross premiums were not reduced by premiums paid for unauthorized reinsurance the amount shown on such schedules VII and VIII as premiums unearned as of December 31, 1936, $ 4,314,469.72, was $ 80,192.06 greater than it would have *711 been had the premiums paid for unauthorized reinsurance been deducted from gross premiums in the same manner as premiums on authorized reinsurance were deducted. The said total of $ 4,314,469.72 also appears as item 18 on page 5 and as item 4 on page 10 of the annual statement.
The petitioner's computation of unearned premiums as of December 31, 1935, was identical in form with the method just described, and as a result the amount of unearned premiums as of December 31, 1935, *70 $ 4,388,040.80, was $ 52,090.71 greater than it would have been had the premiums paid on unauthorized reinsurance been deducted from gross premiums in the same manner as premiums on authorized reinsurance were deducted.
In his notice of deficiency respondent increased income for 1936 in the amount of $ 28,101.35. That amount is the difference between the unearned premiums on risks reinsured with unadmitted com panies as of December 31, 1936 ($ 80,192.06) and as of December 31, 1935 ($ 52,090.71).
On its annual statement, in computing the amount recoverable on December 31, 1936, from salvage and reinsurance on paid losses, the petitioner did not include an amount of $ 8,566.87 recoverable from unadmitted companies on account of salvage and reinsurance on paid losses. The petitioner similarly computed the amount recoverable on December 31, 1935, from salvage and reinsurance on paid losses, and thus did not include $ 8,005.63 representing the amount recoverable on December 31, 1935, from unadmitted companies on account of salvage and reinsurance on paid losses.
In the notice of deficiency respondent increased income for 1936 in the amount of $ 561.24. That amount is the difference*71 between the amount recoverable from unadmitted companies on account of salvage and reinsurance on paid losses as of December 31, 1936 ($ 8,566.87), and as of December 31, 1935 ($ 8,005.63).
On its annual statement, in computing the amount recoverable on December 31, 1936, from reinsurance on unpaid losses, the petitioner did not include an amount of $ 54,262.75 recoverable from unadmitted companies on unpaid losses. The petitioner similarly computed the amount recoverable on December 31, 1935, from reinsurance on unpaid losses, and thus did not include $ 42,934.73 representing the amount recoverable on December 31, 1935, from unadmitted companies on unpaid losses.
In his notice of deficiency respondent increased income for 1936 in the amount of $ 11,328.02. That amount is the difference between the amount recoverable for reinsurance on unpaid losses from unadmitted companies as of December 31, 1936 ($ 54,262.75), and December 31, 1935 ($ 42,934.73).
*712 During the years here involved the petitioner was one of about seventy-five insurance companies associated as "Factory Insurance Association," hereinafter referred to as F. I. A., for the purpose of writing so-called "improved*72 or sprinklered" risks. In writing insurance on large properties it was the practice to issue individual company policies in amounts sufficient to equal the total insurance required. In insuring similar small properties, however, that arrangement meant a large number of policies with frequent changes due to endorsement or cancellation of the policies. With respect to insurance on the so-called "small lines" business, the petitioner was selected by lot by the executive committee of F. I. A. to issue the policies. In connection with this small lines business and in accordance with the petitioner's agreement with F. I. A., the premiums on all such policies were paid to the petitioner and the petitioner paid all of the expenses and losses relating thereto. Three years after the policies were written, the petitioner paid the computed net proceeds from such small lines business to F. I. A., and immediately thereafter F. I. A. disbursed such proceeds to the insurance company members of the F. I. A., in accordance with the percentage participation of each member.
On its annual statement, in computing gross premiums the petitioner included gross premiums on F. I. A. business. On the schedule*73 relating thereto no reinsurance premium deduction was taken because of such F. I. A. business, as no specific reinsurance was necessary. This was true because the business was handled for the "pool" and the net income subsequently divided between the members of F. I. A. By reason of this treatment of such F. I. A. business the amount shown as net premiums, $ 3,899,460.76, was $ 16,866.55 greater than it would have been had F. I. A. premiums been omitted, and such figure of $ 3,899,460.76 was also greater than it would have been had the petitioner merely treated its percentage interest in such F. I. A. premiums as being its own business.
On its annual statement, in computing gross premiums charged, the petitioner included F. I. A. premiums. By reason of such inclusion the amount shown as unearned premiums on fire insurance on December 31, 1936, $ 3,863,171.26, was $ 24,898.98 greater than it would have been had such F. I. A. premiums been omitted. This inclusion of F. I. A. business likewise increased by $ 24,898.98 the amount of $ 4,314,469.72 appearing as item 18 on page 5 and as item 4 on page 10 of the annual statement. Likewise, these amounts of $ 3,863,171.26 and $ 4,314,469.72*74 were each greater than they would have been had the petitioner merely treated its percentage interest in such F. I. A. premiums as being its own business.
The petitioner's computation of unearned premiums as of December 31, 1935, was identical in form with the method just described pertaining *713 to F. I. A. business, and as a result the amount of unearned premiums as of December 31, 1935, $ 4,388,040.88, was $ 31,303.88 greater than it would have been had such F. I. A. premiums been omitted, and such amount of $ 4,388,040.88 was greater than it would have been had the petitioner merely treated its percentage interest in such F. I. A. premiums as being its own business.
In computing losses incurred in the amount of $ 1,577,193.11 the petitioner included losses of $ 8,108.71 which related to F. I. A. business. In computing expenses incurred in the amount of $ 1,921,876.24 the petitioner included expenses of $ 2,583.17 which related to F. I. A. business. Such amounts of $ 1,577,193.11 and $ 1,921,876.24 were each greater than they would have been had the petitioner merely treated its percentage interest in such F. I. A. losses and expense as being its own liability. Such amount*75 of $ 1,921,876.24 did reflect a credit to an expense account in the amount of $ 520.21, which represented the amount received by the petitioner in 1936 from F. I. A. as the petitioner's share of the net proceeds of all F. I. A. small lines business.
The petitioner did not carry the amount shown as item 5 on page 10 of the annual statement, $ 3,973,031.84 to item 3 on page 2 of its income tax return but instead reported $ 3,949,760.39 thereon. The difference of $ 23,271.45 relates to F. I. A. business as appears in items 1, 2, and 4 on page 10 of the annual statement, as follows:
| F. I. A. gross premiums not offset by reinsurance | $ 16,866.55 | |
| F. I. A. unearned premiums | $ 31,303.88 | |
| Excess of unearned premiums due to F. I. A. business | 24,898.98 | 6,404.90 |
| 23,271.45 |
The petitioner did not carry the total of the amounts shown as items 14 and 19 on page 10 of the annual statement, $ 1,577,193.11 and $ 76,654.63, respectively ($ 1,653,847.74), to item 22 on page 2 of its income tax return, but instead reported $ 1,645,739.03 thereon. The difference of $ 8,108.71 represents the above mentioned losses relating to F. I. A. business.
The petitioner did not carry the total of*76 the amounts shown as item 24 on page 10 and item 48 on page 11 of the annual statement, $ 1,921,876.24 and $ 73,074.75, respectively ($ 1,994,950.99), to item 15 on page 2 of its income tax return, but instead reported $ 1,939,861.25 thereon. The difference of $ 55,089.74 is made up of the following:
| Federal income tax | $ 47,806.28 |
| Furniture and fixtures (appearing in expenses on the annual | |
| statement) | 2,244.50 |
| Foreign income tax claimed as a credit instead of as an expense | 2,455.79 |
| Expenses relating to F. I. A. business | 2,583.17 |
| 55,089.74 |
*714 Years 1937 and 1938.
The stipulation of facts contains detailed facts as to 1937 and 1938 comparable to those set out above as to 1936. Those facts are incorporated herein by reference and will be taken into account in the computation under Rule 50 consequent hereon.
Stipulated Facts as to Missouri Rate Cases.
For some years prior to 1935 the petitioner, and numerous other fire insurance companies writing insurance in Missouri, charged premiums in excess of the rates approved by the Commissioner of Insurance of Missouri. Litigation ensued, and in connection therewith the United States District Court having jurisdiction*77 ordered that the "excess premiums" be impounded with an official designated by the court pending the determination of the litigation.
For the period from June 1, 1930, to April 30, 1935, the petitioner had $ 76,684.24 of its "excess premiums" so impounded. In closing its books for the year 1935 the petitioner accrued as income $ 60,000 as estimated recovery of the said impoundments of "excess premiums." It also accrued $ 25,000 estimated commissions and expenses in connection with the said recovery. In its 1935 Federal income tax return the petitioner reported $ 35,000 ($ 60,000 minus $ 25,000) as taxable income.
In 1936 the petitioner actually recovered $ 61,347.40 instead of the estimated $ 60,000 of the said impounded "excess premiums." The actual commissions and expenses in connection therewith amounted to $ 21,381.68 instead of the estimated $ 25,000. In 1936 the petitioner made appropriate entries in its books and accrued as income for 1936 the difference between the estimated figures and the actual figures, or $ 4,965.72.
In his notice of deficiency covering the years 1936, 1937, and 1938 the respondent determined that, by reason of the facts relating to the release of the*78 said impounded "excess premiums," the petitioner received taxable income in 1936 in the amount of $ 35,000 in excess of the amount reported by the petitioner on its 1936 income tax return.
The petitioner has filed a claim for refund of income tax by reason of its reporting the said $ 35,000 as taxable income in 1935. Final action with respect to such claim has not been taken by the Commissioner pending the outcome of this proceeding. By reason of the statute of limitations the maximum amount which is refundable to the petitioner with respect to the year 1935 is $ 2,608.62. In the event the petitioner in 1935 erroneously reported income with respect to "unadmitted reinsurance," the maximum amount which is refundable to the petitioner with respect to the year 1935 is $ 2,007.46.
*715 Respondent's Action on F. I. A. Business.
With respect to the F. I. A. business the respondent, in his notice of deficiency for the years 1936, 1937, and 1938, made no adjustments in the income reported by the petitioner on its returns.
Stipulated Facts as to Granite State Insurance Issues.
The portions of the stipulated facts relating to the petitioner, Granite State Fire Insurance Co., *79 and pertinent to its issue, are as follows:
The petitioner, Granite State Fire Insurance Co., hereinafter called Granite State, is a corporation organized under the laws of the State of New Hampshire, with offices in Portsmouth, New Hampshire, and is an insurance company other than life or mutual. Its return for the year 1936 was filed with the collector of internal revenue for the district of New Hampshire.
The petitioner filed its annual statement for the year involved with the Insurance Commissioner for the State of New Hampshire. Such statement form is the form approved by the National Convention of Insurance Commissioners.
During the year here involved the petitioner, in accordance with accepted practice, reinsured portions of its risks with other companies. Some of such reinsurance was placed with unadmitted companies which were not authorized to do business in the State of New Hampshire. Hereinafter such companies are referred to as unadmitted companies and such reinsurance is referred to as unauthorized reinsurance.
On its annual statement, in computing premiums of $ 1,095,576.74 the petitioner deducted return premiums of $ 292,606.15 and reinsurance premiums of $ 443,744.40*80 from gross premiums of $ 1,831,927.29. Such reinsurance premiums in the amount of $ 443,744.40 included premiums for reinsurance placed by the petitioner with unadmitted companies.
In computing the amount of gross premiums shown on schedules VII and VIII on page 7 of its annual statement, the petitioner did not reduce gross premiums by the amount of the premiums paid by the petitioner for unauthorized reinsurance, although gross premiums were reduced by the amount of premiums paid by the petitioner for authorized reinsurance. Because gross premiums were not reduced by premiums paid for unauthorized reinsurance the amount shown on such schedules VII and VIII as premiums unearned as of December 31, 1936, $ 1,247,995.95 ($ 1,175,317.86 plus $ 72,678.09), was $ 4,978.77 greater than it would have been had the premiums paid for unauthorized reinsurance been deducted from gross premiums in the same *716 manner as premiums on authorized reinsurance were deducted. The said total of $ 1,247,995.95 also appears as item 18 on page 5 and as item 4 on page 10 of the annual statement.
The petitioner's computation of unearned premiums as of December 31, 1935, was identical in form with this*81 method just described, and as a result this amount of unearned premiums as of December 31, 1935, $ 1,250,874.94, was $ 5,310.12 greater than it would have been had the premiums paid on unauthorized reinsurance been deducted from gross premiums in the same manner as premiums on authorized reinsurance were deducted. In his notice of deficiency the respondent did not decrease income for 1936 in the amount of $ 331.35. That amount is the difference between the unearned premiums on risks reinsured with unadmitted companies as of December 31, 1936 ($ 4,978.77), and as of December 31, 1935 ($ 5,310.12).
During the years prior to 1936 the petitioner placed some reinsurance with unadmitted companies. In such years the petitioner treated such unauthorized reinsurance on its annual statement and reported its income on its Federal income tax returns in the same manner as in the year 1936. By reason of the method of accounting and reporting of its income thus employed by the petitioner it did, according to the respondent's contentions as to what was the proper method for the petitioner to report its income, understate its income in such prior years by amounts in excess of $ 331.35 and thereby*82 secured Federal income tax benefits. Adjustment of such prior years' returns are now barred. In view of these facts the respondent made no adjustment to the petitioner's 1936 income by reason of this $ 331.35 decrease in unearned premiums on risks reinsured with unadmitted companies between December 31, 1935, and December 31, 1936.
In its annual statement, in computing the amount recoverable on December 31, 1936, from salvage and reinsurance on paid losses, the petitioner did not include an amount of $ 33.59 recoverable from unadmitted companies on account of salvage and reinsurance on paid losses. The petitioner similarly computed the amount recoverable on December 31, 1935, from salvage and reinsurance on paid losses, and thus did not include $ 25.85 representing the amount recoverable on December 31, 1935, from unadmitted companies on account of salvage and reinsurance on paid losses.
In his notice of deficiency the respondent increased income for 1936 in the amount of $ 7.74. That amount is the difference between the amount recoverable from unadmitted companies on account of salvage and reinsurance on paid losses as of December 31, 1936 ($ 33.59), and December 31, 1935 ($ *83 25.85).
On its annual statement, in computing the amount recoverable on December 31, 1936, from reinsurance on unpaid losses the petitioner *717 did not include an amount of $ 160.59 recoverable from unadmitted companies on unpaid losses. The petitioner similarly computed the amount recoverable on December 31, 1935, from reinsurance on unpaid losses, and thus did not include $ 5.10 representing the amount recoverable from unadmitted companies on unpaid losses. In his notice of deficiency the respondent increased income for 1936 in the amount of $ 155.49. That amount is the difference between the amount recoverable for reinsurance on unpaid losses from unadmitted companies as of December 31, 1936 ($ 160.59), and December 31, 1935 ($ 5.10).
The petitioner did not carry the total of the amounts shown as item 24 on page 10 and item 48 on page 11 of the annual statement, $ 554,902.93 and $ 18,571.17, respectively ($ 573,474.10), to item 15 on page 2 of its income tax return, but instead reported $ 552,018.50 thereon. The difference of $ 21,455.60 is made up of the following:
| Federal taxes | $ 20,629.11 |
| Furniture and fixtures (appearing in expenses on the annual | |
| statement) | 558.69 |
| Foreign income tax claimed as a credit instead of as an expense | 267.80 |
| 21,455.60 |
*84 The Insurance Commissioner of the State of New Hampshire, hereinafter called the Insurance Commissioner, requires fire insurance companies to make their annual statements to him on the Convention Form. He is a member of the Convention. He would not permit the petitioners to deviate from the form. The petitioners used the Convention Form in reporting their income for all taxable years.
The Insurance Commissioner permits no credits for unauthorized insurance. The insurance companies must set up their reserves for all their liability, including transactions with unauthorized companies, despite the fact that the Convention Form makes no specific mention of the unauthorized insurance. The Insurance Commissioner would compel the correction of all infractions of his requirement. No written rule or regulation governs this treatment of unauthorized insurance and transactions with unadmitted companies, but it has been the established policy of the Insurance Department and its accepted practice and usage for many years so to do.
The petitioner, New Hampshire, has always reported its income on such basis. The Insurance Commissioner has very broad discretionary authority in imposing his*85 methods of treating unauthorized insurance. Unless the insurance companies are admitted to do business in New Hampshire they are treated as though they do not exist.
The Convention Form is accepted by every state of the Union and the District of Columbia. The petitioner, New Hampshire, filed its annual reports in all of those states and in the District of Columbia. *718 Figures relating to transactions with unadmitted companies were omitted from the petitioner's annual statements on the Convention Form because it is the accepted practice in all states so to treat them. The State of New Hampshire had the first insurance commissioner in the United States. The Insurance Commission was established about 1851 and has functioned continuously since that date.
Facts as to New Hampshire Stock Purchase.
During 1929 New Hampshire increased its capital stock, reducing its par value from $ 100 to $ 10 per share. The market price then was $ 60 per share. New Hampshire sold some of its stock at that price to its agents in West Virginia. Harold D. Stephan was a supervising state agent for that state. He had authority to act for New Hampshire.
In 1936 the market price for the stock*86 was about $ 42 or $ 43 per share. Some of the New Hampshire agents in West Virginia became dissatisfied with their investment in the company stock. In 1936 Stephan, acting on the authority of a vice president of New Hampshire (now deceased), purchased from such agents 100 shares of the company stock at $ 57.75 per share. About October 15, 1936, New Hamphire received a sight draft for $ 5,775 in favor of the Union National Bank of Sistersville, West Virginia, honored the draft, paid the $ 5,775 on October 17, 1936, and thus acquired the 100 shares of its own stock. Subsequently the company sold the stock for $ 4,212.50 and claimed the difference between that amount and the purchase price, or $ 1,562.50, as a loss on its return for 1936.
The purchase of the stock was made because the company considered it good business to do so and in order to keep faith with its agents in West Virginia, although it did not feel that it was actually forced to reacquire the stock.
Facts as to Missouri Rate Case Accruals.
On November 18, 1935, the Subscribers Actuarial Committee, with offices in Chicago, Illinois, informed New Hampshire by circular letter that in the "Missouri Rate Case" the court*87 had made several orders and had filed a memorandum opinion and that disposition of the matter was complicated by the intervention of one policyholder who challenged the settlement. The court held that the policy holder had the right to disclaim the settlement for himself alone and also permitted other policyholders to disclaim by December 31, 1935. The letter further stated: "This does not interfere in any way with distribution of money pertaining to all other policyholders, who will be considered as adopting and approving the settlement."
*719 The letter also stated that 80 percent of the impounded money would be paid to the companies and that shortly after December 31 an order would be entered by the court directing a distribution, except as to amounts affected by intervention. The letter then added that shortly after the first of the year the bulk of the money would be distributed and the greater part of it made available to the companies.
On January 14, 1936, the Subscribers Actuarial Committee sent a circular letter to New Hampshire stating that no intervention by any policyholders had been filed by December 31 and that distribution was delayed on account of the application*88 of attorneys for fees of $ 60,000 for their services in aiding the court. The letter recited that the difficulty of getting the three judges together to hear the application, the preparation of briefs, etc., would delay the entering of the final decree. This letter was received by New Hampshire prior to closing its books.
On February 4, 1936, the Subscribers Actuarial Committee by circular letter notified New Hampshire that a final decree had been entered by the "statutory three-judge court" on February 1, 1936, disposing of the Missouri rate case. The letter recited that, no policyholder having intervened, the distribution was made under the settlement terms. There followed a detailed description of the processing order of distribution.
New Hampshire's books for the year 1935 were closed on December 31, 1935, as to cash transactions. As to the calculation of reserves the books were closed prior to February 4, 1936, the date of the company's annual meeting, at which the completed statement of the company was presented. The letter of the Subscribers Actuarial Committee dated February 4, 1936, was not received by New Hampshire until after that date.
The letters of the Subscribers*89 Actuarial Committee dated November 18, 1935, and January 14, 1936, led New Hampshire to believe that the impounded funds would be distributed soon after January 1, 1936, and hence that they should be accrued as income for 1935. The funds were actually distributed in 1936. Both petitioners kept their books on the accrual basis.
OPINION.
The major issue presents a question that, so far as we can discover, has never been answered judicially. It is, in essence, whether, under the provisions of section 204 (b) of the Revenue Acts of 1936 and 1938, the statutory standard (the Convention Form), universally long accepted and established throughout the United States, which does not recognize transactions with unadmitted companies, shall govern the computation of income of insurance companies other than life or mutual, or whether the entire business done by such companies, including transactions with unadmitted companies, shall be *720 considered as correctly reflecting income for a given year and therefore form the basis for such computation. The petitioners argue for the former method; the respondent for the latter.
At the outset it is well to state the axiomatic fact that insurance*90 bookkeeping and accounting are highly complicated processes. Of course all agree with the fundamental principle that, generally speaking, tax returns must truly reflect income. The problem here is to establish a basis of computation which will best accomplish that end, in view of the difficulties and complexities inherent in the insurance business and its calculations.
Prior to 1921 no specific standard or requirements had been established to govern the return of insurance company income. The Revenue Act of 1921 however set up a definite standard by which such income was to be measured in 1922 and subsequent years. Helvering v. Oregon Life Insurance Co., 311 U.S. 267">311 U.S. 267. Section 246 (b) (1) of that act is as follows:
Sec. 246. (a) That, in lieu of the taxes imposed by sections 230 and 1000, there shall be levied, collected and paid for the calendar year 1922, and for each taxable year thereafter, upon the net income of every insurance company (other than a life or mutual insurance company) a tax as follows:
* * * *
(b) In the case of an insurance company subject to the tax imposed by this section --
(1) The term "gross income" means the combined*91 gross amount, earned during the taxable year, from investment income and from underwriting income as provided in this subdivision, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners.
This subsection, in almost identical words, is succeeded by section 204 (b) (1) of the Revenue Acts of 1936 and 1938. The entire subdivision (b) appears below. 1
*92 *721 It is a well settled principle that laws are enacted, and hence must be interpreted, in the light of the commonly understood and accepted meaning of their language in the particular trade or business to which they are applicable. Willcuts v. Milton Dairy Co., 275 U.S. 215">275 U.S. 215; O'Hara v. Lukenbach S. S. Co., 269 U.S. 364">269 U.S. 364; Sonn v. Magone, 159 U.S. 417">159 U.S. 417; Maddock v. Magone, 152 U.S. 368">152 U.S. 368; Merton's Law of Federal Income Taxation, para. 3.15.
The legislative history of the tax statute relating to insurance companies plainly shows that Congress was well aware of the difficulty of imposing a proper tax on a business so complex and technical as insurance. An amendment to the existing statute was offered by Senator Simmons and passed by the Senate (Congressional Record, vol. 57, p. 670) providing a new system of insurance taxation to be incorporated in the 1918 Act, but the House failed to concur (Conference Committee Report, p. 72). Thereafter an extended discussion of the problem ensued before the 1921 Act was passed. The following is an excerpt*93 from the hearings on H. R. 8245 (the Revenue Act of 1921) before the Committee on Finance, United States Senate, 67th Congress, 1st session, p. 394 (confidentially printed but released by the Joint Committee on Internal Revenue Taxation for public use and reference):
Senator Smoot: If you have other amendments, present them now, Dr. Adams.
Dr. Adams: Let me take up fire and miscellaneous insurance companies This is an important matter. At the present time you have a special scheme of insurance for life insurance companies, and the first insurance companies are left under existing law. The law relating to insurance companies to-day is highly defective. Under the strict letter of the law there is a possibility of duplicating the same deductions three times.
The difference arises from attempting to apply deductions applicable to ordinary corporations to insurance companies and then adding certain special deductions to which insurance companies are entitled. In the plan presented here the income and deductions are expressed in their own technical terms. *722 All these insurance companies, as you know, have to make reports every year. Those are uniform reports. They are carefully*94 worked out, and the interests of the public are properly safeguarded. In the proposed amendment the terms used in this report are employed. It starts out in this way: The ordinary insurance company has a possibility of making two kinds of profits; that is, it collects premiums from policyholders and on these it may make an underwriting income. Then they invest these funds, and have an investment income, and there is a possibility of a net income from that source. This plan starts out by saying that insurance companies shall be taxed upon their net underwriting income plus their net investment income, if any. Then the whole scheme of computing net income has, as is necessary in the case of insurance companies, to be on the accrued or incurred basis instead of on the actual cash basis. That is the basis of this uniform report, and it is adopted here.
* * * *
It is obvious from the above discussion and explanation that Congress comprehended the completely universal use of the Convention Form; that it conformed the phraseology of the statute to the technical terms appearing in the form; that for Federal tax purposes it adopted bodily the Convention Form and its method of reporting*95 its transactions resulting in income, and that it had a thorough knowledge of the provisions of the form properly safeguarding the interests of the public. The Convention Form does not recognize the petitioner's transactions with unadmitted companies. Such transactions do not enter into its income as set forth on the Convention Form and are not permitted to be included in any of the calculations there appearing.
The entire Federal tax structure is a creature of Congress. That legislative body has laid down generally the basis on which tax must be computed and paid. It has granted complete tax exemption to certain classes of taxpayers. It has allowed credits and deductions in circumstances explicitly defined. It has set up specific standards by which certain taxpayers must be measured in order to ascertain the statutory tax which they shall pay.
Congress has seen fit to enact a special statute governing the imposition of tax upon "insurance companies other than life or mutual * * * in lieu of the tax imposed by sections 13 and 14." It established the Convention Form as the standard for determining the tax on such companies. Therefore, the Convention Form as understood, followed, *96 and applied in the insurance world must control the computation of income of the petitioners, insurance companies other than life or mutual.
The respondent argues that, since the various definitions contained in section 204 (b) did not refer specifically to "unadmitted companies," "unauthorized reinsurance," and other such phrases, income from transactions with unadmitted companies should be included in the petitioners' returns. However, as we have seen, this does not follow. *723 The Convention Form itself ignores such items and usage, and the specific prohibition by state authority has compelled their omission. As was stated in the above quoted discussion of the Senate Finance Committee, the very terms of the Convention Form were incorporated into the statute in their own "technical" words. Congress has taken the Convention Form as its pattern for this peculiar legislation. It should be followed precisely according to its terms and as employed, accepted, and complied with throughout the United States.
The petitioners make the comment that the rule sought by them is a practical one as well as one required by law. They say that in the long run the tax consequences are bound*97 to be of no importance but that the disruption of the accepted practice results only in confusion and expense to insurance companies and added burdens of administration by the Bureau of Internal Revenue. We believe that this observation is pertinently made, since the items relating to transactions with unadmitted companies are generally reflected in cash charges or credits when such transactions are completed. Hence, over a period of years doubtless approximately the same amount of income would be earned and tax paid thereon by the use of either method.
The case of United States Merchants & Shippers Insurance Co., 13 B. T. A. 164, in which the position taken by the respondent was directly opposite that now assumed, was decided by us on facts quite similar to those now before us. Although the decision in that case involved 1921 income, it was not governed by section 246 of the Revenue Act of 1921, which first applied to 1922 income. The decision did not purport to be an interpretation of section 246 (b) of the 1921 Act.
With respect to the respondent's argument that if adjustments were made in the petitioners' income relating to unauthorized insurance, *98 and thereby their income were decreased, no decreases should be considered because of prior tax advantage, we have only to say that, under our decision on the primary issue, no such adjustments will be made. The issue thus becomes moot.
The petitioners have not included their Factory Insurance Association business in their income tax returns. That business was set forth on the Convention Form and therefore must be included in such returns. The petitioners concede that this procedure is proper, although the respondent made no adjustments in his notice of deficiency relating to the Factory Insurance Association transactions. Due consideration will be given to this concession upon the recomputation of the petitioners' income.
The facts relating to the alleged loss sustained by the petitioner, New Hampshire, on the purchase and sale of its own stock are so clear that the issue is comparatively simple. The petitioner sold its stock in 1929 to certain of its West Virginia agents at $ 60 per share. In *724 1936 the market price had dropped to about $ 42 per share. The agents became dissatisfied with their investment. Acting upon the authority of an officer of the petitioner, *99 Stephan purchased 100 shares of New Hampshire stock for $ 5,775. The petitioner later paid the purchase price and acquired the stock. The purpose of purchasing the stock was to "keep faith" with the agents. The petitioner's officers considered it good business to redeem its stock at approximately the price paid by the agents but felt under no obligation, legally or otherwise, to do so.
It is apparent from the facts that the petitioner paid its purchase price of $ 5,775 for a purpose other than the acquisition of the securities. Estate of J. R. Monroe, 45 B. T. A. 1060; affd., 132 Fed. (2) 126. The market price at that time was $ 42 or $ 43 and the stock was later sold at approximately that figure. Thus the transaction resulted in no gain or loss. The excess over market paid by Stephan did not represent a part of the cost, even if it can be said that the market price was the real cost basis. Majestic Securities Corporation v. Commissioner, 120 Fed. (2d) 12, affirming 42 B. T. A. 698.
The moral obligation to keep faith with the petitioner's agents was not a *100 proper element of cost. Burns v. Commissioner, 31 Fed. (2d) 399. Prices in excess of market paid for personal reasons are not the correct measure of cost. Anna L. Raymond, 40 B. T. A. 244; affd., 114 Fed. (2d) 140; Donald McDonald, Jr., 28 B. T. A. 64; cf. Hugh M. Matheson, 31 B. T. A. 493. Thus, in view of the circumstances surrounding the repurchase of the petitioner's stock, no deductible loss is allowed.
The final issue in controversy is the propriety of accruing in 1935 income and expenses in connection with the impounded "Missouri rate case" premiums. The petitioner, New Hampshire, so accrued the premiums and expenses in the estimated amounts of $ 60,000 and $ 25,000, respectively, reported the difference, $ 35,000, as taxable income on its return for the year 1935, and paid the tax thereon.
In the last analysis the question is whether or not the petitioner, on the accrual basis, was justified in believing in 1935 that it was entitled to $ 60,000 of the impounded premiums and that its expenses chargeable to the litigation*101 would be $ 25,000, and hence correctly accrued these items on its books for that year. We believe that it was. In November 1935 the petitioner was notified by the Subscribers Actuarial Committee that shortly after December 31, 1935, the court would direct distribution of the impounded premiums, except as to amounts affected by intervention. In November only one policyholder had intervened, but the court held that other policyholders had the right to intervene and disclaim on or before December 31, 1935. The petitioner was assured that such intervention did not interfere with the distribution of the remaining premiums.
*725 Consequently, in December 1935 the petitioner became virtually certain that it would receive a large portion of its impounded premiums, provided no widespread intervention would develop. In January 1936, before the petitioner closed its books, it learned that no other policyholder had intervened and that thus the door was closed to further doubt concerning its receipt of the premiums.
The petitioner was informed that a claim for attorneys' fees had been filed, but that matter did not relate to the basic determination of the case; only to administration*102 expenses. The amount was less than the petitioner's impounded premiums, and "numerous" companies were parties to the proceedings. It is fair to assume that the claim for fees, if allowed in full, was expected to have very little effect on the amount finally paid to the petitioner.
While the petitioner's books for the year 1935 were still open, there remained nothing to be done except to carry out the terms of settlement and to dispose of the minor matter of attorneys' fees. Under these circumstances the petitioner was led to believe, and properly so, that it was entitled to receive, and therefore to accrue, at least $ 60,000 of the impounded premiums, and it estimated that its cost in securing the return of premiums would be $ 25,000. Subsequent payment of both premiums and expenses indicates that its estimates were quite accurate.
The petitioner relies on Brooklyn Union Gas Co., 22 B. T. A. 507; affd. 62 Fed. (2d) 505, in which the situation was very similar to that now before us. The respondent argues that this Court has departed from the theory of that case in its decision in Clifton Manufacturing Co., 1 T. C. 71.*103 We do not agree with the respondent's view. In the Clifton case the decision was predicated on a set of facts which we thought did not warrant the accrual. However, the Circuit Court of Appeals reversed us. Clifton Manufacturing Co. v. Commissioner, 137 Fed. (2d) 290. There the court stated that "complete solvency of the debtor became practically certain at least a year before the debt was paid so that its accruability was then established." [Emphasis supplied.] The court considered that the facts rendered the debt practically sure of payment.
The same principle applies here. The petitioner sought to recover its own premiums which had been withheld through litigation. The outcome of the case was fixed by the settlement decree and the failure of policyholders to intervene. The subsequent actions of the court were mere formalities and had no vital bearing on the basic decree releasing the funds. These circumstances inspired in the petitioner that reasonable certainty upon which the accrual should have been and was based. The petitioner is sustained on this issue.
Decisions will be entered under Rule 50.
Footnotes
1. 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;
(6) Losses incurred. -- "Losses incurred" means losses incurred during the taxable year on insurance contracts, computed as follows:
To losses paid during the taxable year, add salvage and reinsurance recovarable outstanding at the end of the preceding taxable year, and deduct salvage and reinsurance recoverable outstanding at the end of the taxable year. To the result so obtained add all unpaid losses outstanding at the end of the taxable year and deduct unpaid losses outstanding at the end of the preceding taxable year;
(7) Expenses incurred. -- "Expenses incurred" means all expenses shown on the annual statement approved by the National Convention of Insurance Commissioners, and shall be computed as follows:
To all expenses paid during the taxable year add expenses unpaid at the end of the taxable year and deduct expenses unpaid at the end of the preceding taxable year. For the purpose of computing the net income subject to the tax imposed by this section there shall be deducted from expenses incurred as defined in this paragraph all expenses incurred which are not allowed as deductions by subsection (c) of this section.↩