Appeal from the District Court of the United States for the Eastern District of Pennsylvania; William H. Kirkpatrick, Judge.
Before WOOLLEY, DAVIS, and THOMPSON, Circuit Judges.
The question in this case is whether or not the Philadelphia Contributionship, the plaintiff-appellee, is exempt from taxes on its income under section 231 (11) of the Revenue Act of 1926 (26 USCA § 982 (11), as a mutual fire insurance company, "the income of which is used or held for the purpose of paying losses or expenses."
The plaintiff is a mutual fire insurance company largely doing business in Philadelphia. Only the holders of policies of insurance issued by the company are members and no payments have ever been made to any one other than the holders of its policies with the exception of operating expenses.
The plaintiff issues perpetual contracts of fire insurance for which a single premium deposit is paid in to the plaintiff at the time the policy is issued. If a holder cancels a contract of insurance within three years of the time that the plaintiff issued it, 90 per cent. of the premium deposit is returned to him; if he cancels it between three and five years, 95 per cent. is returned; and if it is canceled after five years, the full amount is returned. Since 1895, the plaintiff has distributed annually out of its net investment income, to holders whose policies have been in force for more than ten years, amounts equal to 10 per cent. of their respective premium deposits. The plaintiff returned $44,233.80 in 1925 and $45,800.33 in 1926 to its policy-holders.
Premium deposits are entered in the books of the plaintiff as liabilities to their full amount. The deposits and income from the investments of the plaintiff are carried in a general fund. At the end of 1925 and 1926 the plaintiff held premium deposits of $1,149,035.74 and $1,198,251.14, respectively; its surplus was $8,174,884.50 and $8,607,028.40; its net investment income was $199,925.62 and $153,043.82; its policies outstanding were in the amount of $44,292,000 and $46,366,000.
The Commissioner of Internal Revenue disallowed the plaintiff's claim to exemption under section 231 (11), 26 USCA § 982 (11), and determined that under section 234 (a) (11), 26 USCA § 986 (a) (11), the plaintiff had a taxable net income of $199,925.62 for 1925 and $153,043.82 for 1926. The Commissioner permitted the plaintiff to deduct premium deposits for the years involved.
The plaintiff paid the taxes assessed and, after filing claims for refund, brought this action in the District Court to recover the amounts so paid. The case was tried to the District Court and it rendered judgment for the plaintiff on the ground that it was an organization within the meaning of section 231 of the Revenue Act of 1926 (26 USCA § 982) which provides:
"Sec. 231. The following organizations shall be exempt from taxation under this chapter -- * * *
"(11) Farmers' or other mutual hail, cyclone, casualty, or fire insurance companies or associations * * * the income of which is used or held for the purpose of paying losses or expenses."
The Commissioner determined that the plaintiff should be taxed under section 230 (26 USCA § 981 note), which provides for corporations generally and that it was entitled to the deductions allowed in section 234 (a) (11), which provides:
"(a) In computing the net income of a corporation subject to the tax imposed by section 230 [section 981 of this title] there ...