Decision will be entered for the respondent.
Petitioner is in the business of issuing cancelable and noncancelable accident and health insurance policies on the assessment plan in Illinois. Its members have a common equitable ownership of assets; its policyholders have the right to be members to the exclusion of others and to choose management; its sole business purpose is to supply insurance at cost to its members; and its members have a right to premiums in excess of amounts to cover losses and expenses. Held, that petitioner is taxable as a mutual insurance company under
49 T.C. 670">*670 Respondent determined the following income tax deficiencies against petitioner:
| Year | Deficiency |
| 1959 | $ 12,911.77 |
| 1960 | 11,699.33 |
| 1961 | 14,878.33 |
| 1962 | 17,688.48 |
The issue for decision is whether petitioner, for the years 1959 through 1962, is taxable as a mutual insurance company under the provisions of
FINDINGS OF FACT
Most of the pertinent facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference and are adopted as part of our findings.
Modern Life & Accident Insurance Co. (herein called petitioner) is an insurance company organized in 1923 under the laws of the State of Illinois. Its principal place of business when it filed its petition 49 T.C. 670">*671 and amended 1968 U.S. Tax Ct. LEXIS 159">*161 petition herein was Chicago, Ill. It filed its Federal income tax returns for the calendar years 1959 through 1962 with the district director of internal revenue at Chicago, Ill., on Forms 1120L as a life insurance company. It annexed to each return a copy of its annual statement filed with the Department of Insurance for the State of Illinois for the corresponding calendar year.
At all times relevant herein the petitioner has carried on the business of issuing cancelable and noncancelable accident and health insurance policies on the assessment plan in Illinois. It has no shareholders and is controlled by its policyholders who have the right to elect its directors. Its articles of incorporation contain the following provisions:
Article I
Section 3. The Board of Directors of the Company shall fix the fee rates and the amount of premiums, and the time and manner of payments thereon, and may change the same from time to time, as the experience of the Company may require; they have also the power to vote for an additional assessment whenever it may be necessary. An affidavit made by the person having charge of the mailing of notices of assessments, shall be prima facie evidence thereof.
Article 1968 U.S. Tax Ct. LEXIS 159">*162 II
Section 1. The members of the Company shall be those who appear on the books of the Company as holders of one or more policies that are not over four weeks in arrear.
* * * *
Section 4. A quorum at any meeting of members shall consist of a majority of members, in person or by proxy, except failing such a quorum the meeting may be postponed to a date not later than thirty days, and a quorum at such postponed meeting shall consist of 300 members in person or by proxy.
Section 5. At such meetings, all questions shall be determined by a majority vote of the policyholders present in person or by proxy; each policyholder being entitled to one vote for each policy in his names as appears upon the record.
Article III
Section 1. The affairs of this Company shall be under the management of its Board of Directors, and such officers and agents as said Board may elect or employ.
Section 2. The Board of Directors shall consist of five (5) members. Said Directors shall be elected each year at the annual meeting of the policyholders to hold office for a continuous three year term, until the election of their successors. Vacancies in the Board shall be filled by the Board of Directors. The person elected 1968 U.S. Tax Ct. LEXIS 159">*163 shall hold office until the next annual meeting of the policyholders, when the vacancy shall be filled as usual.
The board of directors fixes the amount of assessments to be collected from petitioner's policyholders. These assessments are called premiums. No assessments except the regularly scheduled premiums have been levied against the policyholders since prior to 1947.
Petitioner has never paid dividends to its policyholders. However, all of the policies issued by it are participating policies.
49 T.C. 670">*672 Petitioner's unassigned surplus is held solely for its policyholders. It had the following unassigned surplus at the end of each year:
| Year | Amount |
| 1959 | $ 140,296.98 |
| 1960 | 192,288.77 |
| 1961 | 222,499.74 |
| 1962 | 228,219.63 |
In each of the above years, however, the annual statement filed by petitioner showed an outstanding liability in the amount of $ 115,000 which represented advances by outsiders to enable petitioner to carry on its business. These "Guarantee Fund Certificates" were treated as a contingent offset against its unassigned surplus.
OPINION
Petitioner was incorporated in 1923 to operate as an insurer under an assessment plan in accordance with an Illinois statute enacted in 1893. During the years 1959 1968 U.S. Tax Ct. LEXIS 159">*164 through 1962 it operated as an Assessment Accident and Health Company under article XXI of the Illinois Insurance Code of 1937. 3 Petitioner contends that it cannot be taxed as a mutual company under
Petitioner asserts that, in determining whether it is a mutual company for Federal tax purposes, we must rely on pertinent State law. We disagree. The petitioner's status for Federal income tax purposes must be determined under Federal law. There is no indication, either in the statutory language of the insurance provisions or in the related legislative history, that Congress intended for mutual insurance companies to be taxed other than under a nationwide scheme of taxation. 649 T.C. 670">*673 Cf.
Prior to 1942 mutual insurers were taxed under rather loose, ineffective statutes. The Revenue Act of 1942 introduced the present breakdown of insurers into life, mutual, and other than life or mutual, the latter category 1968 U.S. Tax Ct. LEXIS 159">*167 also including specific types of mutuals. The House report 7 accompanying that bill contains the following statements:
2. MUTUAL INSURANCE COMPANIES OTHER THAN LIFE
Section 144 of the bill * * * also completely revises the taxing provisions, basing the levy on underwriting and investment income, in a manner similar to that applied to stock insurance companies other than life. * * *
3. INSURANCE COMPANIES OTHER THAN LIFE OR MUTUAL
These deductions are granted under the limitations that obtain for mutual insurance companies other than life, and their effect is to put stock companies on a fair competitive basis with mutual companies in respect of their participating insurance.
These statements by the House reflect an intent to define mutual insurance companies in an extremely broad manner for Federal tax purposes, i.e., in the sense of policyholder-oriented organizations as opposed to stock companies. A similar intent is revealed in the Senate report. 8 In addition, it is clear that Congress considered assessable insurance policies and intended to treat assessment companies as mutual insurers for Federal tax purposes. This 1968 U.S. Tax Ct. LEXIS 159">*168 is shown by language that: "Section 207(b)(2)
Neither the Internal Revenue Code of 1954 nor the regulations thereunder define a mutual insurance company. However, the courts are in general agreement that mutual insurance companies have the following characteristics: Common equitable 1968 U.S. Tax Ct. LEXIS 159">*169 ownership of assets by members; the right of policyholders to be members to the exclusion of others and to choose management; sole business purpose of supplying insurance at cost; and the right of members to the return of premiums which are in excess of the amount needed to cover losses and expenses. Thompson v. White River Burial Ass'n., supra;
Applying these criteria to the facts of this case, we conclude that petitioner was a mutual insurance company taxable under
Under petitioner's articles of incorporation its policyholders are its members, its directors are elected by them, and "all questions shall be determined" by the policyholders. That the policyholders have 1968 U.S. Tax Ct. LEXIS 159">*170 such rights is convincing evidence that petitioner meets this particular requirement of mutual insurance companies.
The third characteristic, viz, supplying insurance to its policyholder-members at cost, is also present here. Under petitioner's bylaws its board of directors has the right to set the premiums as required by its experience and "to vote for an additional assessment whenever it may be necessary." This demonstrates a clear intent to provide insurance at cost. So also does the fact that after the "Guarantee Fund Certificates," representing advances to petitioner, are taken into account, petitioner had a deficit unassigned surplus at the beginning of 1959 10 This indicates that throughout its history petitioner has had no real profit motive, and the relatively small increases in unassigned surplus for 1959 through 1962 do not convince us otherwise.
49 T.C. 670">*675 Petitioner meets the last characteristic of a mutual insurance company, namely, that its members have a right to premiums 1968 U.S. Tax Ct. LEXIS 159">*171 in excess of amounts needed to cover losses and expenses. Petitioner contends that under applicable Illinois law, 11 it cannot pay dividends to its policyholders since the following condition must be met:
Sec. 666. Dividends
(3) The declaration and payment of dividends by any company subject to the provisions of this article shall be subject to the following conditions:
(a) No dividend shall be declared or paid at any time except out of earned, as distinguished from contributed, surplus, nor when the surplus of the company is less than the original surplus required in section 43 [n2] for the kind or kinds of insurance the company is authorized to write nor when the payment of such dividend will reduce its surplus to less than such amount. [Footnote omitted.]
Petitioner then notes that section 43 (ch. 73, sec. 655) requires that a company writing accident and health insurance maintain a surplus of at least $ 200,000. However, this restriction on dividends which applies to petitioner, through reference by section 889 of the Illinois Insurance Code, also applies to all mutual insurers in the State of Illinois. Yet petitioner would not argue that this restriction disqualifies all mutual 1968 U.S. Tax Ct. LEXIS 159">*172 insurers in the State of Illinois from treatment as mutual insurance companies for Federal tax purposes. As evidenced by the declarations contained in its annual statements, petitioner's surplus is held for the benefit of its policyholders; and there is nothing, in the Illinois Insurance Code of 1937 or in petitioner's articles of incorporation, to indicate that such premiums in excess of losses and expenses do not belong to the policyholders or that dividends cannot be declared when there is an earned surplus.
Nor must there be actual distributions to policyholders before a company can qualify as a mutual insurance company for Federal income tax purposes. See Thompson v. White River Burial Ass'n., supra;
Petitioner meets the Court-applied criteria used to ascertain 1968 U.S. Tax Ct. LEXIS 159">*174 whether it is a mutual insurer. Likewise, we are unaware of any statutory language, either in the Internal Revenue Code or the Illinois Insurance Code of 1937, which prohibits the treatment of assessment companies as mutual insurers. Accordingly, we hold that petitioner was a mutual insurance company during the years in question.
Decision will be entered for the respondent.
Footnotes
1. All subsequent references herein are to the Internal Revenue Code of 1954 unless otherwise specified.↩
2. In each of the years before the Court the petitioner filed its Federal income tax return on Form 1120L as a life insurance company taxed under sec. 802. The correctness of this action was the basis of its petition filed on June 21, 1965. However, in an amended petition filed Oct. 16, 1967, and in its opening statement at trial, petitioner has abandoned this position. It now contends that it is an insurance company other than life or mutual and is taxable under secs. 831 and 832, and in conjunction with this contention, now claims the following overpayments:
↩Year Overpayment 1959 $ 6,874.64 1960 1,372.79 1961 6,836.33 1962 5,139.78 3. Ill. Ann. Stat. ch. 73, secs. 983-989 (Smith-Hurd 1965).↩
4. Ill. Ann. Stat. ch. 73, secs. 648-672 (Smith-Hurd 1965).↩
5.
Sec. 821(a) . Imposition of Tax on Mutual Companies Other Than Interinsurers. -- There shall be imposed for each taxable year on the income of every mutual insurance company (other than a life or a marine insurance company or a fire insurance company subject to the tax imposed by section 831 and other than an interinsurer or reciprocal underwriter) a tax computed under paragraph (1) or paragraph (2), whichever is the greater: * * *6. While we express the view that mutual insurance companies are to be taxed under a nationwide scheme and ultimately hold that petitioner is a mutual company, we would also reach the same result if Illinois law were applied. Under Illinois law the fact that an insurance company issues assessable insurance policies does not exclude it from treatment as a mutual company. See Ill. Ann. Stat. ch. 73, sec. 667 (Smith-Hurd 1965); and
People v. Crossley, 36 Ill. 2d 298">36 Ill. 2d 298 , 222 N.E.2d 488↩ (1966).7. H. Rept. No. 2333, 77th Cong., 1st Sess. (1942),
1942-2 C.B. 395↩ .8. S. Rept. No. 1631, 77th Cong., 2d Sess. (1942),
1942-2 C.B. 531-532 and615-618 ↩.9.
1942-2 C.B. 617↩ .10. Petitioner's annual statement filed for the year 1959 showed an unassigned surplus as of Dec. 31, 1958, in the amount of $ 97,136.59. However, this did not take into account the "Guarantee Fund Certificates."↩
11. Ill. Ann. Stat. ch. 73, sec. 666(3)(a) (Smith-Hurd 1965).↩
12. This figure takes into account the "Guarantee Fund Certificates.↩