*1120 Petitioners are fire insurance companies doing business in the State of Missouri. In 1922 the superintendent of insurance ordered a reduction in fire insurance rates. Petitioners contested the rate reduction order, which was finally sustained in 1930. Pending final determination of the validity of the rate reduction order, petitioners collected premiums at the former rate. In 1930 the excess premiums were refunded to all policyholders who could be located, but some could not be located and petitioners retained a large sum in excess of the reduced rates. The superintendent of insurance sought to collect those excess amounts on behalf of the unlocated policyholders. Petitioners resisted, denying liability both as to the superintendent of insurance and the unlocated policyholders. In 1935 petitioners were ordered to pay over the excess into the custody of the court and during that year the amounts were so paid. Held, the amounts paid into the custody of the court in 1935 were properly deducted in that year as return premiums.
*483 In these proceedings respondent determined deficiencies in Federal income taxes for the calendar year 1935 as follows:
| County Fire Insurance Co. of Philadelphia | $138.63 |
| Great American Insurance Co | 2,265.50 |
| American Alliance Insurance Co | 1,121.24 |
| Union Insurance Society of Canton, Ltd | 217.55 |
All of the deficiencies arise out of respondent's disallowance of deductions from gross income claimed by petitioners by reason of money paid over during the taxable year 1935 into the custody of the Circuit Court of Cole County, Missouri, in final settlement of certain litigation. Petitioners contend that respondent erred in refusing to allow the deductions claimed.
FINDINGS OF FACT.
The facts are stipulated and we hereby adopt the stipulation as our findings of fact. They may be summarized as follows:
All of the petitioners are engaged in the insurance business (not life) and are taxable as insurance companies. The County Fire Insurance Co. of Philadelphia, petitioner in Docket No. 100636, is a Pennsylvania corporation having its principal place of business at 1 Liberty Street, New York, New York. The Great American Insurance*1122 Co., petitioner in Docket No. 100637, is a New York corporation having its principal place of business at 1 Liberty Street, New York, New York. The American Alliance Insurance Co., petitioner in Docket No. 100638, is a New York, corporation having its principal place of business at 1 Liberty Street, New York, New York. The Union Insurance Society of Canton, Ltd., petitioner in Docket No. 100740, is a corporation organized under the laws of the British Colony of Hongkong having its principal place of business at 59 John Street, New York, New York.
Petitioners filed their Federal corporation income tax returns for the calendar year 1935 with the collector of internal revenue for the second district of New York.
Petitioner Union Insurance Society of Canton, Ltd., filed its return on March 7, 1936, disclosing a tax liability of $16,714.92, which was paid to the collector of internal revenue in quarterly installments of $4,178.33 each on March 7, June 6, September 9, and December 9, 1936. On November 17, 1937, additional tax in the amount of $331.22 was paid by petitioner Union Insurance Society of Canton, Ltd., resulting from an adjustment to taxable income reported, bringing*1123 the total tax paid to that date to $17,046.14. On February 4, 1939, a claim for refund was filed by said petitioner with the collector of internal revenue for the second district of New York in the amount *484 of $128, the claim being based upon the allowance of deduction for additional home office expense in the amount of $928.32, as stated in the notice of deficiency.
On January 5, 1922, Ben C. Hyde, then Superintendent of the Insurance Department of the State of Missouri, ordered a reduction of 15 percent in the rates of insurance charged by all stock fire insurance companies doing business in the State of Missouri on fire, lightning, hail, and windstorm insurance written by them in Missouri. Petitioners were affected by that order. Together with the other companies affected, petitioners brought a joint equitable action in the Circuit Court of Cole County, Missouri, and a temporary restraining order was entered preventing the enforcement of the rate reduction. On February 14, 1922, a stipulation was entered into between the superintendent of insurance and the companies affected, including petitioner, which provided that the superintendent should withdraw his 15 percent*1124 rate reduction order; that a hearing should be held; and that if, on the basis of the investigation, reduction was ordered and the insurance companies were dissatisfied with the order, review should be sought by trial de novo in the Circuit Court of Cole County, Missouri. It was further agreed that no injunction should be applied for restraining enforcement of the order, but pending review and final determination the old rates should be charged and the insurance companies should give bond, in such amount as the court should direct, to refund to the assured any excess premium collected by them if the order of reduction should be finally sustained by decree or judgment of a court of last record.
The 15 percent rate of reduction order was withdrawn on the same day and on October 9, 1922, after hearings, a 10 percent rate reduction, effective November 15, 1922, was ordered.
On November 10, 1922, petitioners, along with other insurance companies (not life) likewise doing business in Missouri, commenced a new proceeding in the Circuit Court of Cole County, Missouri, to review the superintendent's order of October 9, 1922. The proceeding was entitled Aetna Insurance Company*1125 et al v. Ben C. Hyde, Superintendent of the Insurance Department of the State of Missouri. On the same day the court ordered the insurance companies to file a bond in the amount of $500,000 and the bond was filed. Subsequently, on August 23, 1923, an additional bond in the same amount and same form was executed.
A judgment setting aside the 10 percent rate reduction was entered by the Circuit Court of Cole County on December 22, 1924, on the ground that the rate reduction order was invalid because confiscatory. On appeal to the Supreme Court of Missouri decision was entered on *485 May 21, 1926, reversing the judgment of the Circuit Court and sustaining the 10 percent rate reduction. (; .) Rehearing was denied on June 23, 1926.
The insurance companies, including petitioners, thereupon applied to the Supreme Court of the United States for writ of certiorari. An order granting the writ was issued on November 1, 1926. (.) On January 3, 1928, the writ was dismissed, and on March 7, 1928, the Supreme Court of Missouri rendered its final judgment and transmitted*1126 its mandate to the Circuit Court of Cole County, Missouri. The Supreme Court of Missouri subsequently, on its own motion, entered an order retaining jurisdiction in the cause for the purpose of making any other orders or judgments in the future which should seem just and proper.
On January 14, 1928, each of the insurance companies, including petitioners, filed a separate action in the United States District Court for the Western District of Missouri for the purpose of enjoining enforcement of the rate reduction. A temporary restraining order was issued. The matter was heard before a three-judge court and on April 12 and 13, 1929, the temporary restraining orders were set aside and the applications for injunction denied. The insurance companies thereupon appealed directly to the United States Supreme Court and on April 14, 1930, the judgment of the lower court was affirmed. (.)
On May 3, 1930, the insurance companies, including petitioners, dismissed their suits then pending in the Federal District Court and put the 10 percent rate reduction order in effect. This marked the end of the litigation over*1127 the reasonableness or validity of the 10 percent rate reduction order.
After May 3, 1930, petitioners sent out notices to the last known addresses of all policyholders affected by the 10 percent rate reduction order, setting forth the amount of refund that would be paid in accordance with the terms of the bond to each of the policyholders upon written demand within 90 days after mailing of the notices. During 1930 and 1931 petitioner County Fire Insurance Co. of Philadelphia refunded to policyholders who made written demand the sum of $6,311.56. Other policyholders were not heard from for such reasons as their having moved and said notices therefore not having reached them, or their having died, or sales or exchanges of the insured property having been made. There remained in the hands of petitioner County Fire Insurance Co. of Philadelphia the sum of $2,268.64, representing excess premiums for which notices had been mailed and *486 demand had not been received. The $2,268.64 had been included in petitioner's gross income for Federal income tax purposes. Subsequently, from 1932 to 1935, inclusive, demand was made to the extent of $1,260.41 by some of the policyholders*1128 who had not previously been heard from, and that amount was paid out, reducing the excess premiums on hand to $1,008.23 (the item in controversy in Docket No. 100636).
During 1930 and 1931 petitioner Great American Insurance Co. refunded to policyholders who made written demand the sum of $235,365.86. Other policyholders were not heard from. There remained in petitioner's hands the sum of $18,050.04, representing excess premiums for which notices had been mailed and demand had not been received. The $18,050.04 had been included in petitioner's gross income for Federal income tax purposes. Subsequently, from 1932 to 1935, inclusive, additional refunds were made in the amount of $1,573.64, reducing the excess premiums on hand to $16,476.40 (the item in controversy in Docket No. 100637).
During 1930 and 1931 petitioner American Alliance Insurance Co. refunded to policyholders who made written demand the sum of $74,935.97. Other policyholders were not heard from, leaving in petitioner's hands the sum of $8,804.07, representing excess premiums for which notices had been mailed and demand had not been received. The $8,804.07 had been included in petitioner's gross income for*1129 Federal income tax purposes. Subsequently, from 1932 to 1935, inclusive, additional refunds to the extent of $649.64 were made, thereby reducing the excess premiums on hand to $8,154.43 (the item in controversy in Docket No. 100638).
During 1930 and 1931 petitioner Union Insurance Society of Canton, Ltd., refunded to policyholders who had made written demand the sum of $32,923.87. Other policyholders were not heard from. There remained in petitioner's hands the sum of $2,634.94, representing excess premiums for which notices had been mailed and demand had not been received. The $2,634.94 had been included in petitioner's gross income for Federal income tax purposes. Subsequently, from 1932 to 1935, inclusive, additional refunds in the amount of $124.43 were paid, thereby reducing the amount of excess premiums on hand to $2,510.51 (the item in controversy in Docket No. 100740).
At the close of 1930 petitioners did not know whether any demand would ever be made for the excess premiums by policyholders from whom demands had not been freceived at that time.
On June 16, 1930, the State of Missouri and Joseph B. Thompson, successor to Ben C. Hyde, as Superintendent of the Insurance*1130 Department of the State of Missouri, filed in the Supreme Court of the *487 State of Missouri, without express authority of the policyholders affected by the 10 percent rate reduction order, a petition in the case of Aetna Insurance Co. v. Hyde, asking the court to cause an accounting to be had of the excess premiums collected and for an order taking over and providing for their proper distribution. The Supreme Court of Missouri, on December 15, 1930, denied the petition. (; .) Rehearing was denied January 8, 1931.
On February 18, 1931, the successor superintendent, as successor to the action entitled Aetna Insurance Co. v. Hyde, without express authority of the policyholders affected by the 10 percent rate reduction order, filed a motion for restitution in the Circuit Court of Cole County, Missouri. On February 26, 1931, the insurance companies, including petitioners, filed a petition and bond for removal of the motion for restitution to the United States District Court for the Western District of Missouri. Petition for removal was denied. Thereafter the record was certified to the United States District*1131 Court, where, on April 31 (sic ) 1933, the cause was remanded to the Circuit Court of Cole County, Missouri, where the motion for restitution was set for hearing on May 26, 1933. The insurance companies, including petitioners, answered, denying liability both as to the unlocated policyholders themselves and as to the superintendent of insurance as a voluntary representative of the unlocated policyholders. The basis of denial of liability to the policyholders was that recovery could be had only in accordance with the terms of the bond which required that the policyholders should make demand within 90 days after notices were sent to them and that otherwise their claims should be void.
Upon hearing on the motion for restitution the Circuit Court of Cole County, Missouri, Nike G. Sevier, Judge, rendered a joint judgment on May 26, 1933, against the insurance companies, including petitioners.
Thereupon the insurance companies, including petitioners, initiated a proceeding in the Supreme Court of the State of Missouri for a writ of prohibition against Nike G. Sevier, Judge of the Circuit Court of Cole County, Missouri. The writ was denied on May 3, 1934, by the Supreme Court*1132 of Missouri, in banc. Rehearing was denied on June 5, 1934. (; .)
On December 14, 1934, an order was made by the Circuit Court of Cole County, Missouri, requiring the insurance companies, including petitioners, to file by May 15, 1935, reports showing the total premiums collected in excess of the 10 percent reduced rate, the total amounts refunded, and the total amounts not refunded. On December 7, 1935, a final judgment against the insurance companies, including *488 petitioners, was entered requiring them to pay the amounts therein set out. That judgment was the final action in connection with the litigation over the motion for restitution in so far as the insurance companies, including petitioners, were concerned. No appeal was taken from that judgment.
Pursuant to the final judgment, petitioner County Fire Insurance Co. of Philadelphia in 1935 paid into the custody of the Circuit Court of Cole County, Missouri, the amount of $1,008.23, plus interest; petitioner Great American Insurance Co. in 1935 paid into the custody of the Cole County Court the amount of $16,476.40, plus interest; petitioner American Alliance*1133 Insurance Co. in 1935 paid into the custody of the Circuit Court of Cole County the amount of $8,154.43, plus interest; petitioner Union Insurance Society of Canton, Ltd., in 1935 paid into the custody of the Circuit Court of Cole County the amount of $2,510.51, plus interest.
The payment in each instance was made without any determination by the commissioners of the court or the court itself as to the names of the policyholders to whom the funds were due.
The Commissioner of Internal Revenue in each instance allowed the amount of interest paid by the petitioners as a deduction from income for 1935 but disallowed the petitioners' claimed deductions from income for 1935 of the unclaimed excess premiums paid into the court.
OPINION.
VAN FOSSAN: The question for decision is whether petitioners are entitled to deduct from gross income for 1935 the amounts paid into court during that year after final settlement of the rate litigation, or whether the petitioners should have accrued the liability and taken the deduction at some time prior thereto.
Petitioners contend that the excess amounts collected from the unlocated policyholders which were paid into court during 1935 were*1134 deductible in that year either as return premiums under section 204(b)(5) of the Revenue Act of 1934, or as losses incurred under section 204(b)(6). It is the further contention of petitioners that if the amounts be considered as return premiums they are deductible only when paid, and if they be considered as losses they did not accrue prior to 1935, since the liability was in dispute and was not finally determined until that year.
The method of accounting to be followed by an insurance company, other than life or mutual, in determining its gross income is precisely set out in section 204 of the Revenue Act of 1934, the applicable portions of which are as follows:
(b) DEFINITION OF INCOME, ETC. - In the case of an insurance company subject to the tax imposed by this section -
(1) *489 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 * * *;
(2) NET INCOME. - "Net income" means*1135 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;
*1136 (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 recoverable outstanding at the end of the preceding taxable year, and deduct salvage and reinsurance recoverabgle 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;
* * *
Deductions being a matter of legislative grace, the problem which confronts this Board is one of dertermining where the deductions claimed by petitioners fit into the accounting system prescribed by the statute.
Subsection (6) above furnishes a complete answer to the alternative contention that the items in question are deductible as "losses." It is obvious that the "losses" covered thereby are insurance losses as commonly conceived, computed as indicated. The provision is not a "catch-all" covering corporate losses in the sence that the word "loss" is used in section 23 and elsewhere in the revenue act. It would require a distortion of meaning*1137 to comprehend the deductions claimed by petitioners in the category of losses.
Thus it is that if petitioners are to prevail they must establish that the payments into the court are to be catalogued as "return premiums." No other provision of the statute that might be applied is suggested.
In , we had occasion *490 to consider the meaning of the term "return premiums" as used in section 204 of the 1932 Act. We there held that the term did not include dividends declared by the petitioner, an insurance company, other than life or mutual, on participating life insurance policies, and paid or credited for the benefit of policyholders under the various options granted in the policies. Although the problems are by no means identical, we believe certain observations made in the Monarch case are helpful here. We there noted that the term "return premiums" appears in the section defining and designed to arrive at "premiums earned." After observing that the item permitted as a deduction from gross premiums received, we stated, "it may therefore be assumed to be limited to premiums considered 'unearned'."
*1138 The payments into the court were amounts due to unlocated policyholders as a result of the reduction of 10 percent in rates. The amounts had been collected as premiums. The order fixed the amount that could be charged for insurance and, therefore, the amount that could legally be earned. The excess collected was, therefore, unearned.
It is stipulated that these amounts had been included in income of the petitioners. It follows that the subsequent change in character from earned income to unearned income should be reflected in the petitioners' tax accounting.
Respondent does not contend that petitioners are not entitled to a deduction in principle, but maintains they should have accrued the item and taken deduction in some year prior to 1935. Although the rate reduction order became final in 1930 and petitioner proceeded to comply therewith by making refunds to all policyholders on demand, it is stipulated that petitioners did not know at that time whether demand would ever be made for the excess premiums by the unlocated policyholders. The same condition apparently obtained until 1935. There was no certainty the companies would ever have to pay the amounts in question. *1139 Except for the order requiring payment of such amounts into court, petitioners would never have been in position to claim the present deductions. The validity and enforcement of any such order was in litigation until the final order of the court, December 7, 1935. At that date the liability of the companies to pay into court became fixed. Likewise became fixed the amounts due to unlocated policyholders. Our question arises not primarily from the rate reduction order, but from the order requiring payment into court of the amounts due the unlocated policyholders. It was when this order became final and payment into court occurred that the petitioners were in position to accrue the amounts due and claim the deductions here in question. . Since the amounts were paid in the same year the liability became *491 fixed, it is unnecessary to discuss the question of whether "return premiums" may be deducted in any year other than that in which paid.
In our opinion respondent erred in disallowing the deductions claimed.
Reviewed by the Board.
Decisions will be entered for petitioners in Docket Nos. 100636, 100637, 100638.*1140 Decision will be entered under Rule 50 in Docket No. 100740.
KERN concurs only in the result.