Hoosier Casualty Co. v. Commissioner

*1354OPINION.

Milliken:

The petitioner contends (1) that since the policyholders of the Mutual Company had the right to subscribe for stock in the Stock Company the latter was essentially the same as the former; (2) that from January 18,1921, to January 22,1921, the Stock Company was a life insurance company as that term is defined in section 242 of the Revenue Act of 1921; (3) that if the Stock Company was, when it took over the risks of the Mutual Company, an insurance *1355company other than a life or mutual insurance company and therefore falls under section 246 of the Revenue Act of 1921, then neither it nor any like company is taxable for the year 1921; and (4) that the transaction between it and the Mutual Company on January 18, 1921, was in the nature of a sale and that the net amount of assets which it received from the Mutual Company was in no sense a premium for reinsurance. These contentions will be discussed iii the order set forth.

(1) In the final order entered in the action brought by the Attorney General' of Indiana, it is stated:

6. That there is no statute authorizing the re-vneorporation of the defendant mutual Hoosier Casualty Company, and that the defendant The Hoosier Casualty Company is not a re-organization of that company, and that ii any of the policy-holders of said defendant Mutual Company desire to purchase any of the stock of said new company and will forward their certified check therefor to the president of the defendant mutual company, stock to an amount equal to an equity in the mutual company standing to the credit of his policy, after all debts of that company are ascertained, may be purchased and will be issued to said policyholder at par. [Italics supplied.]

If there is any merit whatever in petitioner’s first contention, the above excerpt from the final order in the proceedings in the Superior Court in Marion County, Indiana, together with the fact that only a fraction of one share of a total of 2,000 shares was subscribed by policyholders in the old company other than the office force and their relatives and friends, disposes of the question adversely to petitioner.

(2) The petitioner contends that from January 18, 1921, to January 22, 1921, it was a life insurance company as that term is defined in section 242 of the Revenue Act of 1921. That section reads:

That when used in this title the term “ life insurance company ” means an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per centum of its total reserve funds.

The respondent contends that under the above statute the business of the petitioner, irrespective of whether it entered into the automobile insurance business or not, was not life insurance between the dates of January 18, and January 22, 1921. He points out that by far the greater portion of the risks assumed by the petitioner was for liabilities arising from accidents and health, and that but a small proportion of the liability was for natural death. In view of the conclusions we have reached on this point, it is not necessary for us to decide this question.

The contention of the petitioner is based on the assumption that on January 18, 1921, the petitioner was doing a life insurance business, and that it did not take over the automobile insurance business *1356until January 22, 1921. While petitioner’s secretary-treasurer testified to this effect, his testimony on this point is quite uncertain. He was-asked:

Q. Now, Mr. Ray, you may state upon what elate in January of 1921 the transfer provided for by this contract dated January 19th actually took place, the transfer to the Hoosier Casualty Company of the property and so forth of the automobile insurance company.
A. I am not so sure of the date, whether it was the 18th or 19th or 22nd. The Court proceeding upset us on those different dates.
Q. Well, to refresh your recollection, was not the mutual Hoosier Casualty Company taken over on the 18th and insurance, or automobile insurance, taken over on the 22nd?
A. X'es, I believe that is right.

Opposed to this- are the facts that the contract between the petitioner and the automobile insurance concern was made on January 19, 1921, and that the assets of that concern were set up on petitioner’s books on the same day. The question of the day on which the petitioner began business is still further confused by its verified report to the Commissioner of Insurance of Indiana, wherein it is stated that it began business on January 22, 1921. The outstanding fact is that it was the primary purpose of the office force of the.Mutual Company in organizing the new company to consolidate the automobile insurance concerns, all of which they controlled, with the insurance business of the Mutual Company. It was also their purpose to use the surplus funds of the Mutual Company in purchasing these other concerns and this purpose they could not accomplish until they had brought these funds under their control. As soon, as they were in control they voted to pay $50,000 of said surplus funds to C. H. Brackett, C. W. Bay, and W. H. Latta for, with certain exceptions, all the outstanding automobile insurance, certain specified assets, and the good will of the United Automobile Association.-

It thus appears that these transactions which took place in the space of two days were parts of a general scheme. They can not be separated. We must look to the substance and that substance is that the new corporation was organized for the purpose of acquiring the business of two existing, going concerns and this was accomplished as- soon as the funds of one concern could be used to purchase the business of the other. - -

In order to be classified as a life insurance company, section 242 requires that an insurance company be “ engaged in the business ” of issuing the character of policies therein specified. It is not necessary in this Case to decide what length of time must elapse or what acts must be done before a company can be said to be engaged in a business. It is sufficient to point out that the- petitioner was on Januáry 18, 1921, in the throes of birth, that on that date it had not adopted *1357its by-laws, that but one night intervened between the acquisition of the risks and assets of one company and those of the other, and that the acquisition of both was necessary to the fulfillment of the Scheme. It can not be held that the petitioner was engaged in one class of business for a fraction of a day and over night changed its classification. It is clear that the petitioner, when it took over- the risks and assets of the Mutual Company, was not a life insurance company as that term is defined in section 242 of the Revenue Act of 1921.

(3) The portions of the Revenue Act of 1921 which are applicable to the petitioner’s third contention are the following:

■ Sec. ‘246. (a) That, in lieu-oí 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:
’(1) In the cáse of such a**domestic insurance company the same percentage of its'net income- as is imposed upon other corporations by section 230.
Sec. 230. That, in lieu of the tax imposed by section 230 of the Revenue Act of 1918, there shall be levied, collected, and paid for each taxable year upon the net income of every corporation a tax at the following rates:
(a) JTor the calendar year 1021, 10 per centum of the amount of the net income in 'excess of the credits provided in section 236; and
(¡b) For each calendar year thereafter, 12% per centum of such excess amount.
Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * * * #
(10) In- the case-of insurance companies (other than life insurance companies), in addition to the above (unless otherwise allowed) : (A) The net adr dition required by law to be made within the taxable year to reserve funds (including in the case of assessment insurance companies the actual deposit of‘sums with State or Territorial officers pursuant to law as additions to guarantee or reserve funds) ; and (B) the sums other than dividends paid-within the taxable year on policy and annuity contracts. After December 31, 1921, this subdivision shall apply only to mutual insurance companies other than life insurance companies.

No good reason can be advanced why Congress should intend that insurance companies other than life or mutual companies should escape taxation for the year 1921, and petitioner advances none. It stands on. the cold letter of section 246. The fallacy of this contention is that it overlooks section 230, which is expressly referred to in section 246. Section 230 provides one rate of taxation for the year 1921, and' another rate for all subsequent years. It is therefore reasonable to conclude that what is meant by section 246 is that the taxes imposed therein are in lieu of the taxes imposed by section 230 for years subsequent to 1921. Petitioner also overlooks the provisions of section 234(a) (10), which give to it and similar companies a deduc*1358tion peculiar to the year 1921 alone. Here we have the contention of the petitioner that no tax is imposed for the year 1921, although Congress has granted to it and similar companies a deduction which pertains solely to that year. This results in an absurdity,, and a statute should, if possible, be construed so as not to reach such a result. Thus, it is stated in section 489 of Lewis’ Sutherland Statutory Construction (2d ed.) :

A construction which must necessarily occasion great public and private mischief must never be preferred to a construction that would occasion neither » * * unless the terms of the instrument absolutely require such preference. * * * A statute may be construed contrary to its literal meaning when a literal construction would result in an absurdity or inconsistency, and the words are susceptible of another construction which will carry out the manifest intention.

Construing sections 246, 230, and 234 together, the conclusion can not be escaped that it was the intention of -Congress to tax the petitioner, together with similar companies, on its net income for the year 1921 under and at the rate provided by section 230(a).

(4) The transaction of January 18, 1921, between the petitioner and the Mutual Company was made pursuant to section 4763 of Burns’ Annotated Indiana Statutes, which in part provides:

No such corporation, association or society, organized under the laws of this state, shall transfer its risks to, or reinsure them in any other corporation, association or society, unless the contract of transfer or reinsurance is first submitted to and approved by a two-thirds vote of a meeting of the insured, called to consider the same, of which meeting a written or printed notice shall be mailed to each member, certificate or policy holder, at least thirty days before the day fixed for such meeting.

It is well to remember at this point that the funds transferred were the equitable property of the policyholders in the Mutual Company. Federal Life Ins. Co. v. Kerr, 173 Ind. 613; 89 N. E. 398, involved a contract between the Model Life Insurance Co., an Indiana mutual insurance company, and the Federal Life Insurance Co., under which the Federal Life Insurance Co. assumed the risks of the Model Life Insurance Co. only to a limited extent. The court, in speaking of the funds transferred, said:

Appellee’s insured had contributed to create the fund, and appellant had contributed nothing. In good conscience and by express statute (section 7) it was a trust fund for the policy holders of the Model, a mutual company, and is attempted to be transferred to another company without liability of the latter to account for it for the benefit of those háving an interest in it. Certainly any surplus or reserve belonged to the members. United States, etc., Co. v. Spinks (Ky.) 96 S. W. 889, 13 L. R. A. (N. S.) 1053; Parish v. N. 7., etc., Co., 60 App. Div. 11, 69 N. Y. Supp. 764.

So it appears that the policyholders of the Mutual Company agreed to the transfer of the net fund, which in equity belonged to them, *1359to the petitioner in consideration of the fact that they were insured by the petitioner. To say that the assumption of the general indebtedness of the Mutual Company by the petitioner played any important part in the transaction would be to overlook the facts of the case and especially the letters which the office force wrote to the various policyholders. The character of a transaction like the one under consideration is thus stated by Cooley in his Briefs on the Law of Insurance, vol. I, p. 517:

Thus, where one company assumes all the risks of another company retiring from business, entering into a contract to protect the retiring company from liability on the policies assumed, this is properly a reinsurance contract or policy.

While the term “ reinsurance ” includes a contract whereby one insurance company agrees to indemnify another insurance company on account of risks which the latter is carrying and continues to carry, it also includes a contract such as we have before us. This is in accord with the decision in People v. American Central Ins. Co., 179 Mich. 371; 146 N. W. 235, where it is said:

The term “ reinsurance ” has two meanings. When a fire insurance company, with the consent of the insured, is substituted for another fire insurance company, so that the insured releases the original insurer and looks to the substituted company alone, reinsurance has been effected. A company desiring to cease doing business entirely, or in a particular state, may thus reinsure its risks.

Compare Federal Life Ins. Co. v. Kerr, supra; Federal Life Ins. Co. v. Barnett, 71 Ind. App. 613; 125 N. E. 522; Johannes v. Phoenix Ins. Co., 66 Wis. 50; 27 N. W. 414; Meyer v. National Surety Co., 90 N. J. L. 126; 100 Atl. 164; Weil v. Federal Life Ins. Co., 264 Ill. 425; 106 N. E. 246.

The net surplus was paid to the petitioner in consideration of its contract to reinsure the members of the Mutual Company. This payment falls within the following definition of the term “ premium ” found in 32 C. J., p. 1192:

The word “ premium ”, in the law of insurance, has a well settled and specific meaning which is well understood. In its proper and accepted sense it means the amount paid to the company as consideration for insurance; the consideration for a contract of insurance; the consideration paid for a policy of insurance; the amount paid or agreed to be paid in one sum or periodically to insurer as the consideration for a contract of insurance; the sum which insured is required to pay.

In McPherson Hail Ins. Co. v. Shaw, 113 Kan. 772; 212 Pac. 873, it is said:

The word “premium” appears to be the proper term to use, in designating the sum which one insurance company pays to another on its reinsurance contract. People ex rel. Continental Ins. Co. v. Miller, 177 N. Y. 515, 70 N. E. 10; St. Nicholas Ins. Co. v. Mercantile Mutual Ins. Co., 5 Bosw. (N. Y.) 238; *1360Insurance Co. v. Insurance Co., 38 Ohio St. 11, 43 Am. Rep. 413; National Ins. Co. v. Metropolitan Ins. Co., 226 Ill. 102, 113, 80 N. E. 747.

It is clear that the supreme and controlling consideration for the transfer of the net assets of the Mutual Company was the fact that the old policyholders secured from the petitioner the same character, of insurance which had been furnished them by the Mutual Company. To put it another way, the policyholders agreed to the payment to the petitioner of the net surplus in consideration of its substituting itself for the Mutual Company. In short, the consideration for the transfer was insurance and therefore, the net surplus paid over to the petitioner was a premium paid in one sum for insurance. These views correspond with the construction placed on this transaction by the Superior Court of Marion County, Ind., in its order, set forth in the findings of fact, and in compliance with which the petitioner obtained possession of the assets of the Mutual Company.

It is contended by the petitioner that the net surplus can not be treated as a premium for reinsurance for the reason that it greatly exceeds, as petitioner asserts, the amount necessary to procure such reinsurance. This only means that the petitioner made an extremely good bargain. If so, it is a matter with which we have no concern.

Judgment will be entered for the respondent.