delivered the ppinion of the court.
The Penn Mutual Life Insurance Company, a purely mutual legal reserve company which issues level-premium
Whether thé plaintiff is entitled to recover depends wholly upon the construction to be given certain provisions in § II G. (b) of the Revenue Act of October 3, 1913, c. 16, 38 Stat. 114, 172, 173. The act enumerates among
In applying to insurance companies the system of income taxation in which the assessable net income is to be ascertained by making enumerated deductions from the gross. income (including premium receipts) Congress naturally provided how, in making the computation,
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repayment of the redundancy in the premium should be dealt with. In a mutual company, whatever the field of its operation, the premium exacted is necessarily greater than the expected cost of the insurance, as the redundancy in the premium furnishes the guaranty fund out of which extraordinary losses may be met, while in a stock company they may be met from the capital stock subscribed. It is of the essence of mutual insurance that the excess in the premium over the actual cost as later ascertained shall be returned to the policyholder. Some payment to tire
(a) Mutual fire companies “shall not return as income any portion of the premium deposits returned to their policyholders. ”
(b) Mutual marine companies “shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon suchr-amounts between the ascertainment thereof and the payment thereof.”
(c) Life insurance companies (that is both stock and strictly mutual) “shall not include as income in any year such portion of any actual premium received from any individuál policyholder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder, within such year.”
(d) For all insurance companies, whatever their field of operation, and whether stock or mutual, the act provides that there be deducted from gross income “the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts. ”
The Government contends, in substance, for the rule that in figuring the gross income of life insurance companies, there shall be taken the aggregate of the year’s net premium receipts made up separately for each policyholder.
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The Penn Mutual Company contends for the
First:
The reason for the particular provision made by Congress seems to be clear: Dividends may be made, and by many of the companies have been made largely, by way of abating or reducing the amount of the renewal premium.
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Where the dividend is so made the actual premium receipt of the year is obviously only the reduced amount. But, as a matter of bookkeeping, the premium is
That such was the intention of Congress is confirmed by the history of the non-inclusion clause, (c) above. The provision in the Revenue Act of 1913, for taxing the income of insurance companies is in large part identical with the provision for the special excise tax upon them imposed by the Act of August 5, 1909, c. 6, § 38, 36 Stat. 112. By the latter act the net income of insurance companies was, also, to be ascertained by deducting from gross income “sums other than dividends, paid within the year on policy and annuity contracts”; but there was in that act no non-inclusion clause whatsoever. The question arose whether the provision in the Act of 1909, identical with (c)
There is also a further significant difference. All life, insurance has in it the element of protection. That afforded by fraternal beneficiary societies, as originally devised, had in it only the element of protection. There the premiums paid by the member were supposed to be sufficient, .and only sufficient, to pay the losses, which will fall during the current year; just as premiums in fire, marine, or casualty insurance are supposed to cover only the losses of the year or other term for which the insurance is written. Fraternal life insurance has been exempted from all income taxation; Congress having differentiated these societies, in this respect as it had in others, from ordinary life insurance companies. Compare
Supreme Council of the Royal Arcanum
v.
Behrend,
The dividends, aggregating $686,503, which the Penn Mutual Company insists should have been “non-included, ” or more properly deducted, from the gross income, were, in part, dividends on the ordinary limited payment life policies which had been paid-up. There are others which arose under policy contracts in which the investment feature is more striking; for instance, the Accelerative Endowment Policy or such special form of contract as the 25-year “6% Investment Bond” matured and paid March, 1913, on which the policyholder received besides dividends, interest and a “share of forfeitures.” In the latter, as in “Deferred Dividend” and other semi-tontine policies, the dividend represents in part what clearly could not be regarded as a repayment of excess premium of the policyholder receiving the dividend. For the “share of the forfeiture” which he receives is the share of the redundancy in premium of other policyholders who
Third: The non-inclusion clause here in question, (c) above, is found in § II G. (b) in juxtaposition to the provisions, concerning mutual fire and mutual marine companies, clauses (a) and (b) above. The fact that in three separate clauses three different rules are prescribed by Congress for the treatment of redundant premiums in the three classes of insurance, would seem to be conclusive evidence that Congress acted with deliberation and intended to differentiate between them in respect to income taxation. But the company, ignoring the differences in the provisions concerning fire and marine companies respectively, insists that mutual life insurance rests upon the same principles as mutual fire and marine and that as the clauses concerning fire and marine companies provide specifically for non-inclusion in or deduction from gross income of all portions of premiums returned, Congress must have intended to apply the same rule to all. Neither premise nor conclusion is sound.
Mutual fire, mutual marine and mutual life insurance companies are analogous in that each performs the service called insuring wholly for the benefit of their policyholders and not like stock insurance companies in part for the benefit of persons who as stockholders have provided working capital on which they expect to receive dividends representing profits from their investment. In other words, these mutual companies are alike in that they are cooperative enterprises. But in respect to the service performed fire and marine companies differ fundamentally, as above pointed out, from legal reserve life companies. The thing for which a fire or marine insurance premium is paid is protection, which ceases at the end of the term. If after the end of the term a part of the premium is returned to the policyholder, it is not returned as something purchased with the premium, but as a part of the premium
The purpose of Congress to differentiate between mutual fire and marine insurance companies on the one hand and life insurance companies on the other is further manifested by this: The provision concerning return premiums in computation of the gross income of fire and marine, insurance companies is limited in terms to mutual companies, whereas the non-inclusion clause, (c) above, relating to life
The Penn Mutual Company, seeking to draw support for its argument from legislation subsequent to the Revenue Act of 1913, points also to the fact that by the Act of September 8, 1916, c. 463, 39 Stat. 756, 768, § 12, subsection second, subdivision c, the rule for computing gross income there provided for mutual fire insurance companies was made applicable to mutual employers’ liability, mutual workmen’s compensation and mutual casualty insurance companies. It asserts that .thereby Congress has manifested a settled policy to treat the taxable income of mutual concerns as not including premium refunds; and that if mutual life insurance companies are not permitted to “exclude” them, these companies will be the only mutual concerns which are thus discriminated against. Casualty insurance, in its various forms, like fire and marine insurance, provides only protection, and the premium is wholly an expense. If such later legislation could be considered in construing the Act of 1913, the conclusion to be drawn from it would be clearly the opposite of that urged. The later act would tend to show that Congress
Fourth: It is urged that in order to sustain the interpretation given to the non-inclusion clause by the Circuit Court of Appeals (which was, in effect, the interpretation set forth above) it is necessary to interpolate in the clause the words “within such year,” as shown in italics in brackets, thus:
“And life insurance companies shall not include as income in any year such portion of any actual premium received from any individual policyholder [within such year] as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder, within such year.”
What has been said above shows that no such interpolation is necessary to sustain the construction given by the Circuit Court of Appeals. That court did not hold that the permitted non-inclusion from the year’s gross income is limited tó that portion of the premium received within the year which, by reason of a dividend, is paid back within the same year. What the court held was that the non-inclusion is limited to that portion of the premium which, although entered on the books as received, was not actually received, within the year, because the full premium was, by means of the dividend, either reduced, or otherwise wiped out to that extent. Nor does the Government contend that any portion of a premium, not received within the tax year, shall be included in computing the year’s gross income. On the other hand what the company is seeking is not to have “non-included” a part of the premiums which were actually received within the year, or which appear, as matter of bookkeeping to have been received but actually were not. It is seeking to have the aggregate of premiums actually received within the year
reduced
by an amount which.the company paid out within
If the terms of the non-inclusion clause, (c) above, standing alone, permitted of a doubt as to its proper construction, the doubt would disappear when it is read in connection with the deduction clause, (d) above. The deduction there prescribed is of “the sums other than dividends paid within the year on . policy and annuity contracts. ” This is tantamount to a direction that dividends shall not be deducted. It was argued that the dividends there referred to are “commercial” dividends like those upon capital stock; and that those here involved are dividends of a different character. But the dividends which the deduction clause says, in effect, shall not be deducted, are the very dividends here in question, that is dividends “on policy and annuity contracts.” None such may- be deducted by any insurance company except as expressly provided for. in the act, in clauses quoted above, (a) (b) and (c). That is, clauses (a) (b) and (c) are, in effect, exceptions to the general exclusion of dividends from the permissible deductions as prescribed in clause (d) above.
In support of the company's contention that the interpolation of the words “within the year” is necessary in order to support the construction given to the act by the Circuit Court of Appeals we are asked to consider the legislative history of the Revenue Act of 1918 (enacted February 24, 1919, c. 18, 40 Stat. 1057); and specifically to the fact that in the bill as introduced in- and passed by the House, the corresponding section. (233 (a)) contained the words “within the taxable year” and that these words were stricken out by the Conference Committee (Report No. 1037, 65th Cong., 3d sess.) The legislative history of an act may, where the meaning of the words used is doubt
We find no error in the judgment of the Circuit Court of Appeals. It is
Affirmed.
Notes
The manner in which mutual level-premium life insurance com-. panies conduct their business, and the nature and application of dividends are fully set forth in Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. Rep. 199; Connecticut General Life Ins. Co. v. Eaton, 218 Fed. Rep. 188; Connecticut Mutual Life Ins. Co. v. Eaton, 218 Fed. Rep. 206.
The percentage of the redundancy to the premium varies, from year to year, greatly, in the several fields of insurance, and likewise in the same year in the several companies in the same,field. Where the margin between the probable losses and those reasonably possible is very large, the return premiums,rise often to 90 per cent, or more of the premium paid. This is true of the manufacturers’ mutual fire insurance companies of New England. See Report Massachusetts Insurance Commissioner (1913), vol. I, p. 16.
A separate account is kept by the company with each policyholder. In that account there is entered each year the charges of the premiums payable and all credits either for cash payments or by way of credit of dividends, or by way of abatement of premium.
The dividend provision of the Mutual Benefit Life Insurance Company involved in the Herold Case, supra, 198 Fed. Rep. 199, 204, was, in part: “After this policy shall have been in force on3 year, each year’s premium subsequently paid shall be subject to reduction by such dividend as may be apportioned by the directors.” ' The dividend provision in some of the participating policies involved in the Connecticut General Life Ins. Co. Case, supra, 218 Fed. Rep. 188, 192, was: “Reduction of premiums as determined by the company will be made annually beginning at the second year, or the insured may pay the full premium and instruct the company to apply the amount of reduction apportioned to him in any one of the following plans:” (Then follow four plans.)
Substantially the same questions were involved, also, in Connecticut General Life Ins. Co. v. Eaton, 218 Fed. Rep. 188, and Connecticut Mutual Life Ins. Co. v. Eaton, 218 Fed. Rep. 206, in which decisions were not, however, reached until the following year.
The alleged unwisdom and injustice of taxing mutual life insurance companies while mutual savings banks were exempted had been strongly pressed upon Congress. Briefs and statements filed with Senate Committee on Finance on H. R. 3321 — Sixty-third Congress, first session, Vol. 3, pp. 1955-2094.