Order of Ry. Emps.
Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Aug 24, 1943
2 T.C. 607 (U.S.T.C. 1943)

Docket No. 110521.



Hartley F. Peart, Esq., Howard Hassard, Esq., and Homer H. Tooley, C.P.A., for the petitioner. Samuel Taylor, Esq., for the respondent.

A mutual insurance company does not lose its right to be taxes as such under sec. 207(a), I.R.C., merely because its directors, in the exercise of their discretion, accumulated and held, in an account designated ‘surplus,‘ the excess of premiums over cost for eight years of its existence. The test of determining mutuality is the ownership of the company, its earnings and accumulations, by its policyholders. Mutuality not lost merely because holders of lapsed policies forfeit their right share in the distribution of accumulated surplus. Hartley F. Peart, Esq., Howard Hassard, Esq., and Homer H. Tooley, C.P.A., for the petitioner. Samuel Taylor, Esq., for the respondent.

Petitioner challenges the correctness of the following deficiencies in income tax:

+----------------+ ¦1936 ¦$693.69 ¦ +-----+----------¦ ¦1937 ¦4,497.44 ¦ +-----+----------¦ ¦1938 ¦9,325.93 ¦ +-----+----------¦ ¦1939 ¦8,868.39 ¦ +-----+----------¦ ¦1940 ¦4,045.87 ¦ +-----+----------¦ ¦Total¦27,431.32 ¦ +----------------+

The facts are found to be as stipulated. Other facts appearing in our findings are based upon evidence adduced at the hearing.

The sole issue is whether the respondent erred in holding that petitioner is to be taxes as an insurance company other than life or mutual. Petitioner contends that it is taxable either as a mutual life insurance company or as a mutual insurance company other than life.


Petitioner is a California corporation, incorporated in August 1906. Under its original articles of incorporation petitioner was a fraternal beneficiary society. In March 1919 its articles of incorporation were amended to provide for the issuance to its members of health and accident insurance contracts on the assessment plan. The fraternal and lodge features were eliminated by this amendment.

In May 1926 petitioner's articles were again amended to provide for the issuance to its members of life insurance and annuity or endowment insurance contracts in addition to health and accident insurance. Between 1926 and 1934 petitioner operated as a mutual life, health, and accident insurance company on the assessment plan. During this period its policies contained the following provision:

Mutual Provision: The Order of Railway Employees is a mutual insurance corporation organized and operating under the laws of California. The power is reserved, in the event of and during an emergency, to collect from the members necessary additional amounts to protect this and other like certificates.

On October 18, 1934, petitioner's articles were again amended. The following are excerpts from the articles which were in force during the taxable years:

SECOND: The purposes for which this corporation is formed are: To carry on and transact in the State of California and elsewhere the business of a mutual legal reserve life, and accident and sickness or health insurance company, and life, and accident and sickness or health insurance as a mutual legal reserve insurer; to provide funds by mutual agreement and obligation of the members of this corporation to one another from policy fees, premiums, interest, assessments, and general income, for one or more of said kinds of insurance upon the lives of the members of the corporation and against injury, disablement or death resulting from sickness, sustained or suffered by the members of the corporation; to furnish to its members one or more of said kinds of insurance on the mutual legal reserve plan; to issue to the members of this corporation, in consideration of the payment by them of policy fees and premiums as therein provided, policies or other contracts of insurance, for one or more of said kinds of insurance, specifying the sum or sums to be paid upon the happening of the contingencies insured against and when such payments must be made; * * * from time to time to distribute to the members any surplus of net income which in the judgment of the board of directors it is not necessary to retain for the purposes of the corporation; * * *

SIXTH: This corporation shall not be authorized to issue shares of stock, but shall be composed of members, each of whom shall hold a subsisting policy, certificate of membership, or other contract of insurance issued to each thereof respectively by this corporation, and whose voting rights shall be equal. This corporation is not formed with a view to pecuniary gain or profit to its members.

On October 25, 1934, petitioner was granted a certificate of authority to transact life, accident, and health insurance as a mutual legal reserve insurance company by the Insurance Commissioner of the State of California.

The phrase ‘mutual legal reserve‘ used in petitioner's articles of incorporation as amended in 1934 and its policies thereafter issued refers to provisions of California law which at that time permitted any domestic insurer to convert to a mutual corporation doing an insurance business with a statutory reserve fund for the protection of policyholders in lieu of a provision for special assessments on all policyholders. The California law authorized any domestic insurer having a reserve of at least $200,000 to amend its articles and to elect to operate as a ‘mutual legal reserve company.‘ The $200,000 minimum reserve permits a mutual leg reserve insurer to engage in the business of life insurance. In order to do a health and accident insurance business, an additional $50,000 reserve is required.

Sec. 10,510. (California Insurance Code.) Capital requirements. An incorporated life insurer issuing policies on the reserve basis shall not transact life insurance in this State unless it has a paid-in capital of at least $200,000.Sec. 10,511. Additional capital and classes of insurance. If authorized by its charter, such an incorporated life insurer may transact, in addition to life insurance, any of the following classes of insurance if its total paid-in capital is at least $200,000 in excess of the sum of the amount set forth opposite the classes of insurance transacted:Sec. 10,880. Right of domestic insurer: Proceedings: Filing copy of proceedings: Approval. If a domestic insurer subject to the provisions of this chapter is possessed by admitted assets in excess of all liabilities, and such excess is equal to the minimum paid-in capital required by sections 10,510 and 10,511 of this code to transact the classes of insurance which it proposes to transact, such insurer may, at its option without reincorporation, elect to operate as a mutual legal reserve insurer.Such action shall be by resolution adopted by not less than a two-thirds vote of the policy or certificate holders present in person or by proxy at a duly called meeting for that purpose. A written or printed notice of such meeting shall be mailed to each policy or certificate holder at least thirty days before the day fixed for the meeting. A certified copy of all proceedings relative to such action shall be filed with the commissioner, who, if he finds that the proceedings have been in accordance with law, shall approve the same. (Added by Stats. 1935, p. 1001.)Sec. 10,881. Amending transformed corporation's articles and by-laws. Such transformed corporation may amend its articles and by-laws, and shall be considered a continuation of the original corporation by the same name. (Added by Stats. 1935, p. 1001.)Sec. 10,882. Law applicable to transformed insurer. Thereafter the insurer shall not include in its policies the provisions required by the preceding article, but shall be subject as to subsequent business to the test of solvency provided for life, disability, and life and disability insurers by this code and to all other provisions relating to mutual life, and disability insurance not on the stipulated premium plan. But such election shall not affect the rights or obligations of the insurer or its members on any contract theretofore made. (Added by Stats. 1935, p. 1001.)

Petitioner's officers are elected annually by its directors and its directors are elected annually by its members. Each policyholder is a member and entitled to vote. Each policy issued by petitioner from October 1934 to 1940, inclusive, contained the following provision:

The Order is a mutual legal reserve insurance corporation, and is owned wholly by its policyholders who are its members. This Policy constitutes the evidence of the Insured's membership in the Order and is the certificate thereof. Membership begins upon the taking effect of this Policy and shall end upon the death of the member, or the lapsing or other termination of this Policy. * * * Any failure to comply with the provisions of this Policy shall render invalid any claims hereunder.

Since its inception petitioner has been primarily an organization of railroad employees. Its officers and directors have always been railroad men and at the time of the hearing approximately 90 percent of its members were railroad employees.

On the 1st day of March 1931 petitioner distributed to its then members and policyholders a dividend aggregating $53,918.80. This distribution was made pursuant to resolutions of the board of directors of petitioner adopted on November 11, 1930, and February 11, 1931. Immediately thereafter, and for a period of several years, petitioner's losses and expenses exceeded its current income. This resulted from the nationwide economic depression. As a result of this experience the directors decided it would be inadvisable to pay any dividends ‘for the time being.‘ Their ambition and desire, as expressed at the hearing by their president, was ‘to make the financial condition of the Order absolutely solid and impervious to any kind of condition that might arise in the way of strikes, epidemics or those other conditions that cut so heavily into our income as a result of claims and decreased premium receipts.‘ It was expected that this policy would ‘insure the prompt and equitable payment of claims.‘ During 1934 and thereafter petitioner issued policies providing for payments during the lifetime of the insured, if accidentally injured, whereas the earlier policies had provided for payments during not to exceed 24 months. It also increased its payments for illness from 6 months to 16 months. The directors were desirous of building the surplus up to a point where these additional contingencies would be taken care of. In recent years they were also conscious of the uncertainties created by war. While the declaration of a dividend was discussed, none was made or paid by petitioner after 1931.

During the years 1931 to 1940, inclusive, the reserve funds held by petitioner, and the purposes for which they were held, were as follows:

+--------------------------------------------------------------------------+ ¦ ¦Life reserve¦Statutory reserve ¦Emergency reserve ¦Surplus in ¦ +----+------------+--------------------+--------------------+--------------¦ ¦ ¦(based on ¦fund (held for all ¦fund (held for ¦addition ¦ +----+------------+--------------------+--------------------+--------------¦ ¦ ¦American ¦classes of insurance¦contingencies, e.g.;¦to reserves ¦ +----+------------+--------------------+--------------------+--------------¦ ¦Year¦Experience ¦outstanding, ¦unusual losses ¦(also held for¦ +----+------------+--------------------+--------------------+--------------¦ ¦ ¦Table ¦as required ¦and expenses) ¦contingencies)¦ +----+------------+--------------------+--------------------+--------------¦ ¦ ¦at 3 1/2%) ¦by Cal. law) ¦ ¦ ¦ +----+------------+--------------------+--------------------+--------------¦ ¦ ¦ ¦ ¦ ¦ ¦ +----+------------+--------------------+--------------------+--------------¦ ¦1931¦$37,012 ¦$250,000 ¦$150,000 ¦$15,392.16 ¦ +----+------------+--------------------+--------------------+--------------¦ ¦1932¦40,282 ¦250,000 ¦100,000 ¦20,310.77 ¦ +----+------------+--------------------+--------------------+--------------¦ ¦1933¦44,199 ¦250,000 ¦50,000 ¦57,199.54 ¦ +----+------------+--------------------+--------------------+--------------¦ ¦1934¦46,321 ¦250,000 ¦50,000 ¦43,636.32 ¦ +----+------------+--------------------+--------------------+--------------¦ ¦1935¦52,159 ¦250,000 ¦50,000 ¦55,363.10 ¦ +----+------------+--------------------+--------------------+--------------¦ ¦1936¦55,219 ¦250,000 ¦50,000 ¦72,184.23 ¦ +----+------------+--------------------+--------------------+--------------¦ ¦1937¦60,726 ¦250,000 ¦50,000 ¦117,220.54 ¦ +----+------------+--------------------+--------------------+--------------¦ ¦1938¦64,705 ¦250,000 ¦50,000 ¦188,515.84 ¦ +----+------------+--------------------+--------------------+--------------¦ ¦1939¦68,478 ¦250,000 ¦50,000 ¦258,847.10 ¦ +----+------------+--------------------+--------------------+--------------¦ ¦1940¦71,500 ¦250,000 ¦50,000 ¦302,300.44 ¦ +--------------------------------------------------------------------------+

During each of the taxable years petitioner issued policies of insurance providing for the payment of accident and illness benefits as well as for the payment of a specified principal sum if loss of life resulted from injuries sustained by accidental means. Straight life insurance policies were not issued after 1931.

The following table shows the number of certificates of membership of insurance policies which were outstanding, issued or lapsed during the years 1931 to 1940, inclusive:

+-------------------------------------------------------+ ¦ ¦Life certificates or¦ ¦ ¦ ¦ +----+--------------------+-----------------------------¦ ¦ ¦policies ¦Health and accident policies ¦ +----+--------------------------------------------------¦ ¦Year¦ ¦ +----+--------------------------------------------------¦ ¦ ¦Outstanding ¦ ¦ ¦ ¦Outstanding ¦ +----+-------------+------+-------+-------+-------------¦ ¦ ¦ ¦Lapsed¦Issued ¦Lapsed ¦ ¦ +----+-------------+------+-------+-------+-------------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +----+-------------+------+-------+-------+-------------¦ ¦1931¦604 ¦123 ¦3,205 ¦3,474 ¦14,197 ¦ +----+-------------+------+-------+-------+-------------¦ ¦1932¦487 ¦117 ¦2,317 ¦3,808 ¦12,706 ¦ +----+-------------+------+-------+-------+-------------¦ ¦1933¦421 ¦66 ¦2,220 ¦2,826 ¦12,100 ¦ +----+-------------+------+-------+-------+-------------¦ ¦1934¦399 ¦22 ¦4,492 ¦2,991 ¦13,601 ¦ +----+-------------+------+-------+-------+-------------¦ ¦1935¦381 ¦18 ¦3,245 ¦3,241 ¦13,605 ¦ +----+-------------+------+-------+-------+-------------¦ ¦1936¦361 ¦20 ¦3,953 ¦2,955 ¦14,603 ¦ +----+-------------+------+-------+-------+-------------¦ ¦1937¦349 ¦12 ¦4,202 ¦3,588 ¦15,217 ¦ +----+-------------+------+-------+-------+-------------¦ ¦1938¦334 ¦15 ¦2,887 ¦3,992 ¦14,112 ¦ +----+-------------+------+-------+-------+-------------¦ ¦1939¦320 ¦14 ¦3,504 ¦2,866 ¦14,750 ¦ +----+-------------+------+-------+-------+-------------¦ ¦1940¦304 ¦16 ¦3,652 ¦3,112 ¦15,290 ¦ +-------------------------------------------------------+

Petitioner's income tax returns for the taxable years were filed with the collector of internal revenue for the first district of California.

In the statement attached to the deficiency notice, the respondent gave the following reasons for determining the deficiencies:

It is held that you are not taxable under the provisions of sections 201, 202, and 203 of such revenue laws (Revenue Act of 1936 and corresponding sections of subsequent revenue acts) because you were not a life insurance company engaged in the business of issuing life insurance and annuity contracts during the taxable years under consideration. You ceased the issuance of life insurance policies and annuity contracts prior to January 1, 1936, and thereafter only issued other types of insurance policies, principally health and accident insurance contracts.

It is held that you are not taxable under the provisions of section 207 of such revenue laws because you have not conducted your business as a mutual insurance company. It is of the essence of mutual insurance that the excess in the premiums over the actual costs later ascertained should be returned to the policyholders. There is nothing in your articles of incorporation or by-laws showing that in any event members (policy-holders) are entitled to receive any amount which properly represents a return of the excess of their premiums over the actual cost of the policies as later determined and you did not, during the period under consideration, refund to policyholders any amount of the excess premiums over the cost of such insurance.

You are consequently taxable under the provisions of section 204 of the applicable revenue laws as an insurance company other than life or mutual and your tax liability has been so computed in the following schedule.



The issue is: Under which section of the revenue act shall petitioner be taxed? Respondent has taxed it under section 204(a) of the Revenue Act of 1936 and similar provisions of the Revenue Act of 1938 and the Internal Revenue Code as an insurance company other than life or mutual. Petitioner contends that it is taxable under section 201(a)as a life insurance company, though it places its chief reliance upon, and devotes most of its brief to establishing, the fact that it is a mutual insurance company and hence taxable under section 207(a).

SEC. 204. INSURANCE COMPANIES OTHER THAN LIFE OR MUTUAL.(a) IMPOSITION OF TAX.—(1) IN GENERAL.— In lieu of the tax imposed by section 13 and 14, there shall be levied, collected, and paid for each taxable year upon the normal-tax net income of every insurance company (other than a life or mutual insurance company) a tax of 15 per centum of the amount thereof.

SEC. 201. TAX ON LIFE INSURANCE COMPANIES.(a) DEFINITION.— 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.

SEC. 207. MUTUAL INSURANCE COMPANIES OTHER THAN LIFE.(a) APPLICATION OF TITLE.— Mutual insurance companies, other than life insurance companies, shall be taxable in the same manner as other corporations, except as hereinafter provided in this section, and except that they shall not be subject to the surtax imposed by section 14, and except that the normal tax imposed by section 13 shall be at the rate of 15 per centum instead of at the rates provided in such section, and such normal tax shall be applicable to foreign corporations as well as domestic corporations; but foreign insurance companies not carrying on an insurance business within the United States shall be taxable as other foreign corporations.

In its reply brief petitioner concedes that it does not have the necessary reserve funds held for the fulfillment of life policies to entitle it to classification as a life insurance company under recent decisions of this tribunal. Independent Life & Accident Insurance Co., 47 B.T.A. 894; United Life Insurance Co., 47 B.T.A. 960; General Life Insurance Co., 1 T.C. 555. See also Mothe Burial Benefit Life Ins. Co. v. Fontenot, 46 Fed.Supp. 978. Cf. Swift & Co. Employees Benefit Association, 47 B.T.A. 1011; National Protective Insurance Co. v. Commissioner, 128 Fed.(2d) 948, affirming 44 B.T.A. 978; certiorari denied, 317 U.S. 655; and First National Benefit Society v. Stuart, 134 Fed.(2d) 438. The first two cases cited are pending upon appeal in the Circuit Court of Appeals for the Fifth Circuit. General Life Insurance Co., supra, was reversed by a divided court (C.C.A., 5th Cir., July 8, 1943). With all due deference to the court, we adhere to the views heretofore expressed and hold that, since petitioner did not maintain reserves on its health and accident policies on any actuarial basis and inasmuch as it was not ‘engaged in the business of issuing life insurance and annuity contracts‘ in the taxable years, it can not be classified as a life insurance company.

But is petitioner taxable as a mutual insurance company other than life? Respondent argues that it is not, pointing out that its life and accident and health policyholders pay fixed and level cash premiums, that it is not specifically obligated to distribute to its policyholders each year the excess of the premiums over the cost of the insurance, and that it is engaged to a limited extent in the life insurance business. The existence of the first circumstance is not disputed; but that does not prevent taxing petitioner as a mutual insurance company. Ohio Farmers' Indemnity Co., 36 B.T.A. 1152; affd., Ohio Farmers' Indemnity Co. v. Commissioner, 108 Fed.(2d) 665.

The second point raised by the respondent and the real basis of his determination is: ‘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,‘ Penn Mutual Life Insurance Co. v. Lederer, 252 U.S. 523; New York Life Insurance Co. V. Bowers, 283 U.S. 242. Recognizing that the Supreme Court has not laid down any rule requiring that a ‘dividend‘ or refund of the excess be declared or paid in the year in which the premium is paid, respondent insists that refund t the class of policyholders must be mandatory. He argues that this petitioner is under no obligation to pay any dividend to any of its policyholders at any time. He also points out that there were many lapsed policies during the period from 1932 to 1940 and under petitioner's contract with the holders of such policies they forfeited any interest which they had therein. He argues that this circumstance prevents petitioner from being a true mutual.

Petitioner points out that its articles of incorporation expressly provide that it is a mutual company, ‘not formed with a view to pecuniary gain or profit to its members‘; that it is required ‘ * * * from time to time to distribute to the members any surplus of net income which in the judgment of the board of directors it is not necessary to retain for the purposes of the corporation‘; that its members are the owners of the entire surplus or reserve and they, by appropriate action, could have compelled distribution to themselves at any time; that the fact that holders of lapsed policies forfeited their interest in the surplus does not cause the company to become other than a mutual; and that it should not be denied classification as a mutual merely because its directors, in the exercise of their sound discretion, failed to authorize any distribution to be made during the years 1932 to 1940, inclusive.

The evidence was directed largely toward showing why dividends had not been declared. None was adduced indicating that the directors had acted in bad faith or had been guilty of any abuse of discretion. Without attempting to summarize the evidence, it may be stated generally that the facts which influenced the directors in refraining from declaring a dividend were: (1) The near catastrophe which resulted from the economic depression following the 1931 dividend and which substantially reduced the surplus available for meeting contingencies; (2) the possibility of a recurrence of similar economic depressions; (3) uncertainties, particularly since 1939, created by the second World War; (4) the extra risk involved in issuing accident policies having no cut-off on monthly payments other than the duration of the injury; (5) the increased risk resulting from issuing policies providing for 16 monthly payments in connection with sickness instead of 6 as theretofore; (6) the always present possibility of epidemics; and (7) the possibility that a strike or reduced employment among railroad employees, which constituted approximately 90 percent of petitioner's membership, would result both in increased claims and in decreased revenue.

In Penn Mutual Life Insurance Co. v. Lederer, supra, it was stated: ‘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.‘ In a mutual company some payment to the policyholder, representing such excess, is ordinarily made every year though, as the court pointed out, it ‘is rarely made within the calendar year in which the premium * * * was paid.‘

Provisions are usually contained in the charter, articles of incorporations, or policies of mutual insurance company, vesting in its board of directors discretionary power to determine when the surplus income is to be divided among the members or classes and the proportion thereof. McKean v. Biddle, 37 A. 528; 181 Pa.St. 361; Rothschild v. New York Life Insurance Co., 97 Ill.App. 547; Greeff v. Equitable Life Assurance Society of the United States, 160 N.Y. 19; 54 N.E. 712; Buck v. Ross, 240 N.W. 858; White v. Provident Life & Trust Co., 85 A. 463; 237 Pa. 375; Spruance v. Farmer's & Merchants' Ins. Co., 9 Colo. 73; 10 Pac. 285. Petitioner's articles contain such a provision, which has been set out above. The power given to the directors to exercise their judgment in determining how much of ‘the surplus of net income * * * it is not necessary to retain for the purposes of the corporation‘ clearly vests in them a discretion. Since the record is devoid of any evidence indicating that they acted in bad faith or arbitrarily, fraudulently or capriciously, we are of the opinion that the retention of the amounts shown by our findings does not ipso facto cause petitioner to become other than a mutual company. ‘ * * * an insurance company, acting bona fide, has the right to retain * * * an amount sufficient to insure the security of its policyholders in the future as well as the present, and to cover any contingencies that may arise or may be fairly anticipated.‘ 29 American Jurisprudence, par. 64. Greeff v. Equitable Life Assurance Society of the United States, supra. Nor do we think it can be said, as urged by respondent, that petitioner ‘is under no obligation to pay any dividend to any of its policyholders at any time.‘ They, collectively, are its owners. No individual, class, or group other than the policyholders (members) have any interest in, or power over, it. Equitable Life Assurance Society of the United States v. Bowers, 87 Fed.(2d) 687; Penn Mutual Life Insurance Co. v. Lederer, supra; Spruance v. Farmers & Merchants Insurance Co., supra; Buck v. Ross, supra. It has no capital stock and no shareholders. The members, and they alone, are entitled to all dividends, whether resulting from current operations or paid upon dissolution, and whether they are true dividends or only excess premiums paid.

There is no specific time fixed by the revenue act or indicated by the court decisions within which the excess premiums must be returned. The disadvantages of a yearly distribution were stated by the court of appeals of New York in Greeff v. Equitable Life Assurance Society of the United States, supra, in the following language:

* * * The adoption of principles or methods for the distribution of its surplus by which it was all distributed each year would not only place in jeopardy the security of every existing policy, but its tendency would be to prevent any increase of its business by obtaining new policies, and thus diminish its future receipts. It was essential to the prosperity of the defendant, and consequently to the security of its policyholders, that its business in the future should be increased, or at least maintained, as upon its maintenance its continued solvency and ability to pay future losses principally depended. No prudent person would be inclined to take a policy in a company which had so improvidently considered its affairs that it only retained a fund barely sufficient to pay its present liabilities, and therefore was in a condition where any change, by the reduction of interest upon, or depreciation in the value of its securities, or any increase of mortality, would render it insolvent and subject to be placed in the hands of a receiver * * * .

We do not intimate that Congress intended to allow a mutual insurance company to accumulate and hold, throughout its existence, all of the excess of premiums over cost. It clearly belongs to the policyholders and should be returned to them. Respondent's argument, based upon the testimony of petitioner's actuary, is not wholly without substance. It may be, if the facts demonstrate that a company organized as a mutual has ceased to operate as one, that the privilege of returning its income as a mutual may be denied. As we view the evidence and the stipulated facts in this proceeding, however, a finding that petitioner had ceased to be a true mutual would not be justified.

Respondent's argument, based upon the facts that those who had allowed their policies to lapse will probably never receive back any portion of the amount paid in by them, may be notified briefly. Some courts hold that all policyholders who contribute to the accumulated surplus of a mutual insurance company are entitled to a promotion thereof whether they are policyholders at the time of distribution or not. Smith v. Hunterdon County Mutual Fire Insurance Co., 41 N.J.E. 473; 4 Atl. 652; U.S. Life Insurance Co. v. Sprinks, 96 S.W. 889; rehearing denied, 103 S.W. 335; writ of error dismissed, 209 U.S. 539. Others hold that is the property of the members at the time the distribution is ordered. Zinn V. Germantown Farmers' Mutual Insurance Co., 111 N.W. 1107; 132 Wis. 86; Huber v. Ma#tin, 105 N.W. 1031; 127 Wis. 412. Opinion is expressed in 29 American Jurisprudence, par. 79, that the latter is ‘the better‘ where a distribution is being made upon dissolution. No California decisions on this question have been brought to our attention or found. For present purposes we assume that the provision in the policies issued by petitioner is valid and has the effect of forfeiting all their rights to receive any of the accumulated surplus. It may be that this constitutes ‘a departure in some degree from the original conception of mutual insurance as simply co-operative self insurance at cost * * * . ‘ White Fuel Corporation v. Liberty Mutual Insurance Co., 46 N.E.(2D) 548; but, as the court there remarked, ‘the change may well have been thought necessary in order to give financial stability and continuity to mutual companies equivalent to that given to stock companies by their capital stock and thus to assist the mutual principle as a whole to survive in the insurance business.‘ However that may be, we are of the opinion that the fact that some policyholders may not receive their promotion does not prevent the company from being a mutual. This view finds some support in Penn Mutual Life Insurance Co. v. Lederer, supra. In discussing one type of dividends the court pointed out:

* * * represents in part what clearly would 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 did not persist in premium payments to the end of the contract period.

While the quoted language was not used in discussing the question now before us, it indicates that the court was cognizant of the fact that mutual companies do sometimes distribute to their policyholders amounts attributable to payments made by persons who had permitted their policies to lapse. In our judgment respondent's contention that petitioner may not be taxed as a mutual on this ground is unsound.

Respondent's argument based upon the fact that petitioner is engaged to a limited extent in the life insurance business is not too clear. He says: ‘To come under Section 297 an insurance company must not only be a mutual company, but must be in no way engaged in the life insurance business. Hence, even though that part is a small part of its total business, it cannot come under Section 207.‘ He cites Baltimore Equitable Society v. United States, 77 Ct.Cls. 566; Baltimore Equitable Society v. United States (Ct.Cls), 17 Fed.Supp. 188; and Swift & Co. Employees Benefit Association, supra. In our judgment none of the cited cases support his contention. The first two merely held that a company, originally exempt from tax because it was a ‘Farmers' or other mutual * * * fire insurance company,‘ lost its exemption when it issued policies to nonmembers since the provisions for exemption could not be applied to a company ‘that was partly mutual and partly not.‘ The other case involved a nonstock association of employees of Swift & Co., the members of which, as pointed out in the opinion, had no interest in the surplus of the company or ‘right to participate beyond the specific insurance risk for which * * * (the association was) obligated.‘ It was therefore held that the association was not entitled to classification as a mutual insurance company. Since it also did not meet the requirements made by section 201 for taxation as a life insurance company, it was properly held to be taxable under section 204.

Respondent construes some of the language used in the last cited case as a holding that a mutual insurance company may be taxed under section 207 only if it ‘be in no way engaged in the life insurance business.‘ If the language used is subject to such interpretation, it does not represent the present view of this tribunal. It is manifest Congress intended to provide for the taxation of all insurance companies in Supplement G (section 201 et seq.) of the Internal Revenue Code and the various revenue acts. It divided them into three groups— life insurance companies (section 201), mutual insurance companies other than life insurance companies (section 207), and insurance companies other than a life or mutual insurance company (section 204). ‘Every insurance company other than a life or mutual insurance company ‘ is to be taxed under section 204. Cf. article 204(a)-1 of Regulations 94. There is nothing in the act or regulations to indicate that a mutual company should lose its classification as a mutual insurance company if it should write combined life, health, and accident policies. The test is mutuality rather than type of business. Of course, if it is a life insurance company as defined by section 201(a), it is to be taxed as such; for section 207(a) specifically excludes life insurance companies from the mutual companies which are to be taxed under it.

The Commissioner erred in determining that petitioner is taxable under 204. Uncontested adjustments make it necessary that a recomputation of the deficiency be made.

Decision will be entered under Rule 50.

+---------------------------------------------------------------------+ ¦ ¦ ¦Amount of capital ¦ +--------------------------------------------+------------------------¦ ¦Number and name of class transacted ¦to be added ¦ +--------------------------------------------+------------------------¦ ¦6 Disability ¦$50,000 ¦ +--------------------------------------------+------------------------¦ ¦8 Liability ¦) ¦ ¦ +---------------------------+----------------+------------------------¦ ¦9 Workmen's compensation ¦)---------------¦( 50,000 ¦ +---------------------------+----------------+------------------------¦ ¦10 Common carrier liability¦) ¦( for all or any of them¦ +---------------------------------------------------------------------¦ ¦(Enacted 1935: Amended by Stats.1937, p. 2033) ¦ +---------------------------------------------------------------------+