Appendix — First National Benefit Society v. Stuart

ition.

APPENDIX.

ARIZONA REVISED CobE or 1928.

607. BENEFIT SocrIETIES; LIMITATIONS. Associations

may be formed for the purpose of paying to the nominee

of any member a sum upon the death of said member not

exceeding three dollars for each member of such associa-

tion. No such association shall exceed in number, five

thousand persons.

608. ForMATION. Such association shall be formed

by filing a verified certificate in the office of the recorder

of the county in which the principal place of business is to

be situated, and filing a like certificate in the office of the

corporation commission; such certificate shall state the

general objects of the association, its principal place of

business and the names of the officers selected to hold for

the first three months, and shall be signed by the said

officers and verified by at least three of them.

609. AssESSMENTS. Said association, upon the death

of any member, may levy an assessment, not exceeding

three dollars, upon each living member, and collect and

pay the same to the nominee of such deceased, and may

also provide for annual assessments upon any one member

not to be raised above that established at the time such

member joined the association.

610. Powers Nor Contro_ttep By INSURANCE

Laws. Such association may sue and be sued by its name,

may loan its funds and own sufficient real property for its

business purposes, and such other real property as it may

purchase on foreclosure of its mortgages. Such property

so obtained through foreclosure shall be sold and conveyed

within five years from the day title is obtained, unless the

superior court of the proper county shall, upon petition

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and good cause shown, extend the time. Such association

may make such bylaws as may be necessary for its gov-

ernment and for the transaction of its business, and shall

not be subject to the provisions of the general insurance

laws.

CHAPTER 36, ARIZONA SESSION Laws oF 1937.

Section 1. SHort Tirte. This act may be cited as the

benefit corporation law of 1937. (Now section 53-601,

Arizona Code, 1939.)

Section 2. Section 607, Revised Code of 1928, is

amended to read:

607. Benerit Corporations. Corporations, not for

pecuniary profit, may be formed to provide cash benefits

for members and cash benefits for the nominees of de-

ceased members, and shall include all corporations, socie-

ties and associations operating an insurance business

where funds are provided by mutual contributions, periodi-

cal payments, dues or assessments, except those herein-

after exempted. (Now section 53602, Arizona Code,

1939.)

Sec. 3. Sec. 608, Revised Code of 1928, is amended to

read:

608. ForMaTION. (a) Two hundred or more citizens

of the United States, residents of this state for at least

one year, may form a benefit corporation by filing articles

of incorporation, verified by each of them stating the gen-

eral objects of the corporation, its principal place of busi-

ness, the time of its commencement and termination, the

names of the directors and officers by whom the affairs of

the corporation are to be conducted and the time of their

election, the corporation’s name (which shall indicate its

general character of business and shall not closely resemble

OEP EE AE i ae

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the name of any association, life insurance company, or

corporation now licensed to do business in this state), and

whether private property is to be exempted from liability

for the corporate debts. (Now section 53603 (a), A. C.

1939.)

(b) When the articles of incorporation have been thus

filed and a certified copy thereof recorded in the office of

the county recorder of the county in which its place of

business is situated, and appointment of a statutory agent

filed, the corporation commission shall issue the corpora-

tion a certificate of incorporation. (Now section 53-603

(b), A. C, 1939.)

Sec. 4. Article 3, Chapter 14, Revised Code of 1928,

is amended by adding section 608a.

608a. Minimum Mempersuip. Such corporation

shall have twelve months from the date of its certificate

of authority to secure a minimum of not less than five

hundred members in good standing. Should the member-

ship at any time fall below said minimum, the corporation

shall immediately notify the corporation commission.

Within ninety days thereafter, or such further time as

the commission may allow, the corporation shall increase

its membership to said minimum. If the corporation fails

to increase its membership within the time fixed, the com-

mission shall revoke its certificate of authority and there-

upon such corporation shall liquidate and dissolve. (Now

section 53-604, A. C. 1939.)

Sec. 5. Article 3, chapter 14, Revised Code of 1928,

is amended by adding section 608b:

60&b. Deposit or Money or Security. (a) Every

benefit corporation organized or operating under the pro-

visions of this act, before receiving a certificate of au-

thority to transact business, shall, in addition to the re-

a ERE RE TAIN AE LAVELLE LIA A SIS LTE AG AA a IME SE FN NRE

ign,

quirements of section 609b, deposit with the state treas-

urer, to be by him held in trust for the benefit and pro-

tection of the corporation’s members, the sum of one

thousand dollars. Thereafter a further sum of one thou-

sand dollars, divided into twelve equal monthly payments,

beginning thirty days after the certificate of authority is

issued, shall be likewise deposited with the state treasurer.

Failure to pay any such monthly payments shall auto-

matically cancel the corporation’s certificate of authority.

( Now section 53-605, A. C. 1939.)

(b) In addition to said deposits every such corporation

shall, not later than February 1, 1940, and on or before

February 1 of each year thereafter, deposit with the state

treasurer, to be by him held in trust as hereinafter pro-

vided, for the benefit and protection of the members of

the corporation, a further sum equal to one dollar for each

one thousand dollars of protection in force on December

31 of the preceding year, beginning as of December 31,

1939, until a total of ten thousand dellars has been so de-

posited. (Now section 53-605 (b), A. C. 1939.)

(c) The deposits prescribed by this section shall be

subject to withdrawal from the state treasury in whole or

in part only on the order of and as directed by the corpo-

ration commission, but may, with the commission's ap-

proval, be invested in United States or state bonds, which

shall be placed with and assigned to the state treasurer

and held by him as provided for the original deposits.

Subject to approval by the commission any such securities

may be exchanged for others of like amounts. The in-

terest on said securities shall be payable to the corporation

depositing the same. (Now section 53-605 (c), A. C.

1939. )

incillicsin

(d) Any unsettled final judgment of a court of this

state shall be a lien on the deposits of money or securities

prescribed by section 608b, and subject to execution after

thirty days from entry of final judgment. If said deposit

is depleted thereby it shall be replenished within ninety

days. (Now section 53-605 (d), A. C. 1939.)

(e) Said deposit may be considered as a part of any

required reserve of the corporation and shall not be sub-

iect to withdrawal so long as the corporation has any con-

tract or other liability outstanding. If and when the cor-

poration liquidates, dissolves, or merges with another cor-

poration, and there are no certificates or other liabilities

not satished or assumed, the deposit shall be returned to

the corporation upon the order of the commission, and

placed to the credit of the fund from which it was taken

or paid to the person who may have advanced it. (Now

section 53-605 (e), A. C. 1939.)

WOR). sone Article 3, Chapter 14, Revised Code of 1928,

amended by adding section 608c:

608c. BeNnerit CERTIFICATE. (a) Every benefit cer-

tificate issued by any such corporation shall specify the

maximum amount not exceeding five thousand dollars, on

the life of any individual, to be paid on the happening of

the contingency therein stated, and shall state the basis

or amount to be set aside to the mortuary and reserve

fund. The certificate, including any written amendment

thereto, and, at the option of the corporation, the applica-

tion therefor, and the by-laws of the corporation, shall

constitute the entire contract between the corporation and

the member, and the applicant shall see that all facts re-

quired to be stated are set forth in the application. ( Now

section 53-606 (a), A. C. 1939.)

RP ORs HY CPE TS SENT " = ?

omens

(b) Each corporation shall provide in its certificate for

at least fifteen days’ grace following the due date of any

periodical payment or dues, during which time the certifi-

cate shall not be forfeited. If payments are not made

according to the terms of the certificate all liability of the

member and of the corporation ceases, except as otherwise

provided in the certificate. Any corporation may provide

for a period of time, which shall be stated in the certifi-

cate, for the reinstatement of a lapsed or forfeited certifi-

cate, and for a reinstatement fee. If the corporation re-

quires a written application for reinstatement such appli-

cation shall be the basis of renewing the contract, and any

statement made therein may be used by the corporation

in defense of its rights under the certificate. (Now sec-

tion 53-606 (b), A. C. 1939.)

Sec. 7. Article 3, chapter 14, Revised Code of 1928, is

amended by adding section 608d:

608d. FipeLtity Bonp. The president, vice-president,

or treasurer of every benefit corporation shall furnish a

fidelity bond of a company authorized to transact business

in the state, in the amount of five thousand dollars, pay-

able to the corporation. (Now section 53-607, A. C.

1939.)

Sec. 8. Article 3, chapter 14, Revised Code of 1928, is

amended by adding section 608e:

608e. Liasitity Limitrep. The private property of

the officers, directors, members, beneficiaries, or employees

of any benefit corporation organized under the provisions

of this act shall not be liable for the payment of the debts

of the corporation. (Now section 53-608, A. C. 1939.)

Sec. 9. Sec. 609, Revised Code of 1928, is amended to

read:

ASANTE TI ELIE ILE I II IY BS ID TI OE IE an

PBL ES,

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==

609. PAYMENTS AND Funps. (a) Every benefit cor-

poration shall provide in its benefit certificate for periodi-

cal payments or dues sufficient to pay benefit claims and

general operating expenses as stipulated therein. (Now

section 53-609 (a), A. C. 1939.)

(b) A mortuary and reserve fund, exclusive of other

assets, may be created, out of which may be paid all bene-

fit claims arising under the certificates, the deposits re-

quired to be made with the state treasurer as provided by

section 608b, and attorney’s fees and necessary expenses

arising out of the defense, settlement, or payment of any

contested or disputed claim. The residue of payments

made by members, after setting aside the amount required

for the mortuary and reserve fund, and interest earned by

the assets of the corporation, whether deposited with the

state treasurer or otherwise invested, may be used for gen-

eral operating expenses. (Now section 53-609 (b), A. C.

1939.)

Sec. 10. Article 3, chapter 14, Revised Code of 1928,

is amended by adding section 609a:

609a. EXAMINATION. At least once in every two

years the corporation commission shall require the books

and affairs of each benefit corporation to be examined and

audited by an accountant designated and commissioned by

it, for the purpose of verifying the funds as provided in

the benefit certificate thereof. For such purpose the com-

mission and its auditor shall have free access to all books,

papers and accounts of the corporation. The cost of any

such examination and audit shall be paid by the corpora-

tion, but it shall not be required to pay for more than one

such examination and audit in any one year, nor to ex-

ceed twenty-five dollars for each one thousand certificates

or fraction thereof in force at the time of such examina-

— RET:

aii.

tion except that a corporation chartered under the laws of

another state shall also pay the traveling expenses of the

accountant designated by the commission. All such costs

shall be paid upon the completion of the audit or exami-

nation. (Now section 53-610, A. C. 1939.)

Sec. 11. Article 3, chapter 14, Revised Code of 1928,

is amended by adding section 609b:

Sec. 609b. CERTIFICATE OF AUTHORITY TO TRANSACT

Business. (a) Before any benefit corporation shall so-

licit applications for benefit certificates it shall file a copy

of its certificate with the corporation commission and evi-

dence that it has made the deposit required by section

608c. If the certificate conforms to the requirements of

this act, the commission shall within three days issue a

written certificate of authority to the corporation to trans-

act business. (Now section 53-611 (a), A. C. 1939.)

(b) Upon presentation to the commission of prima

facie evidence that any benefit corporation is wilfully

violating the provisions of this act, the commission shall!

immediately notify such corporation, stating the manner

in which it is alleged the law is being violated. If it ap-

pears to the commission that the corporation is continuing

such violation, it shall cite the corporation to appear with-

in thirty days to show cause why the alleged violations

should not be remedied. If upon said hearing the com-

mission shall find that the corporation is violating the pro-

visions of this act in the particulars stated in the citation,

it shall serve a written notice of its decision upon the

corporation, which shall be subject to the rights of appeal

hereinafter provided. Should the corporation not appeal

from such decision, or if it appeal the appellate court shall

uphold the decision of the commission, the corporation

shall comply with the order of the commission within ten

_ :

ee

days thereafter, and upon its failure so to do, the com-

mission may revoke the certificate of authority of such

corporation. (Now section 53-611, A. C. 1939.)

Sec. 12. Article 3, chapter 14, Revised Code of 1928,

is amended by adding section 609c:

609c. ExEmpTion From ATTACHMENT. No money

paid or to be paid for any benefit, as provided in a certifi-

cate issued by a corporation organized or operating under

the provisions of this act, shall be liable to attachment or

other process, nor may it be seized, taken, appropriated or

applied by any legal or equitable process, nor by operation

of law to pay any debt or liability of any member or his

nominee, except as may be provided in the benefit certifi-

cate. (Now section 53-612, A. C. 1939.)

Sec. 13. Article 3, chapter 14, Revised Code of 1928,

is amended by adding section 609d:

609d. ORGANIZATIONS EXEMPTED. The provisions of

this act shall not apply to secret or fraternal societies,

lodges, or councils, which conduct their business and se-

cure members on the lodge system exclusively, and having

a ritualistic work and ceremonies in their societies, lodges,

or councils, nor to any mutual or benefit association or-

ganized or formed and composed exclusively of members

of any such society, lodge, or council, church or religious

society, nor to any association of employees employed by

one and the same concern, or its subsidiary, nor any labor

organization, nor to any life insurance company labor

organization, nor to any life insurance company organized

or operating under chapter 36, Revised Code of 1928, nor

to any foreign assessment company operating under the

general insurance laws of this state. (Now section 53-613,

A. C. 1939.)

—_— PRR ERT SHERATON ELS FOE EL HL EE PPI LITE LE EY OE

—_ an

Sec. 14. Article 3, chapter 14, Revised Code of 1928,

is amended by adding section 609e:

609e. No VEsTED Property Ricut. No member of

a benefit corporation shall have any vested property right

or title in any deposits or reserve during the life time of

the member, other than as provided in the benefit certifi-

cate. (Now section 53-614, A. C. 1939.)

Sec. 15. Sec. 610, Revised Code of 1928, is amended

to read:

610. Powers oF BENEFIT CorPorATIONS. Any cor-

poration organized under the provisions of this act may

contract, sue and be sued by and in its own name, and

shall not be subject to the provisions of the general insur-

ance laws, and no law hereafter enacted shall apply to

such corporations unless they are expressly designated

therein. They may own sufficient real property for their

business purposes and such other real property as they

may purchase upon foreclosure of their mortgages. Prop-

erty obtained through foreclosure shall be sold and con-

veyed within five years from the date title is obtained un-

less the superior court of the county in which the prin-

cipal place of business of the corporation is located, shall,

upon petition and for good cause shown, extend the time

for such sale and conveyance. Such corporation may

make and amend necessary by-laws, which shall provide

for annual meetings of members who may vote in person

or by proxy. The by-laws or the benefit certificate may

provide for the qualification of members, mode of ac-

ceptance, the fees of admission and periodical payments

or dues, the expulsion of members for non-payment of any

periodical payment or dues, the restoration to member-

ship, the employment and compensation of its agents and

other regulations not in violation of this act. (Now sec-

tion 53-615, A. C. 1939.)

=~

Sec. 16. Article 3, chapter 14, Revised Code of 1928,

is amended by adding section 610a:

610a. Existinc Corporations. Any existing corpo-

rations under the provisions of sections 607, 608, 609 and

610, article 3, chapter 14, Revised Code of 1928, shall be

deemed to be lawfully incorporated, organized and exist-

ing and may continue its corporate existence and transact

business under, and avail itself of the provisions hereof

without reincorporating or requalifying, except that such

corporation shall, on or before January 1, 1938, comply

with the provisions hereof as to statutory agent, minimum

membership, deposits of money or securities, benefit cer-

tificate, fidelity bond, and certificate of authority, and shall

be subject to examination as herein provided. (Now sec-

tion 53-616, A. C. 1939.)

Sec. 17. Article 3, chapter 14, Revised Code of 1928,

is amended by adding section 610b:

610b. ForeEIGN OrGANIzATIONS. No benefit corpora-

tion, association, or society incorporated or transacting

business under the laws of any other state or foreign

country, shall transact business in this state until it com-

plies with the requirements of this act. Any person vio-

lating any of the provisions of this section shall be guilty

of a misdemeanor and upon conviction punished by a fine

of not more than five hundred dollars, imprisonment in

the county jail for not more than six months, or both.

(Now section 53-617, A. C. 1939.)

Sec. 18. Article 3, chapter 14, Revised Code of 1928,

is amended by adding section 610c:

610c. Fitinc Fees. The fees for the filing of instru-

ments and documents pertaining to the organization of

RIMS LE FLERE RIEL ELSON A SS AOR RT Ny OER, | HEAT SE EN BS

sini eave

benefit corporations shall be the same as the fees provided

for filing of like instruments and documents with the cor-

poration commission. (Now section 53-618, A. C. 1939.)

Sec. 19. Article 3, chapter 14, Revised Code of 1928,

is amended by adding section 610d:

610d. CoNnTEsTaBILity. (a) All certificates issued by

a benefit corporation shall be incontestable after three

years from their effective date or three years from the

effective date of any reinstatement after lapse, except for

non-payment of assessment levied.

(b) To contest the validity of a certificate, or deny

liability thereunder, the corporation shall notify the mem-

ber, or if the member is dead, the beneficiary, by regis-

tered letter addressed to such member or beneficiary at the

last address known to the corporation. (Now section

53-619, A. C. 1939.)

Sec. 20. Article 3, chapter 14, Revised Code of 1928,

is amended by adding section 610e:

610e. AppEaL. Any decision of the corporation com-

mission may, within sixty days after the same has been

served on a benefit corporation, be appealed to the superior

court of the county in which the principal place of busi-

ness of such corporation is located. Notice of appeal and

a statement of objection to the commission’s decision shall

be filed with the commission, which shall, within sixty

days after the appeal has been filed, transmit a copy of

such notice and statement, with a certified copy of the

proceedings before the commission, including a transcript

of testimony and all exhibits, to the clerk of the superior

court, who shall docket ‘he appeal in the name of the

Oe eee ee aa an ie ep a a a es a a

sosillte:

appellant as plaintiff and the corporation commission as

defendant. The superior court shall hear such appeal,

with or without jury, unless both parties shall file an

agreement to a continuance. Either the corporation com-

mission or any such corporation or proposed corporation

may appeal from the judgment of the superior court to the

supreme court. (Now section 53-620, A. C. 1939.)

Sec. 21. Article 3, chapter 14, Revised Code of 1928,

is amended by adding section 610f:

610f. Prnatties. Any solicitor, agent, examining

physician, or other persons who wilfully makes any false

or fraudulent statement or misrepresentation in or with

reference to any application for benefit or for the purpose

of obtaining any money or benefit in or to any corporation

transacting business under this act, or any officer of any

such corporation who refuses to permit the corporation

commission or its auditor to make an examination and

audit of the business, books, or records of such corpora-

tion, or who wilfully violates any of the provisions of this

act shall be guilty of a misdemeanor and upon conviction

shall be punished by fine of not more than five hundred

dollars, imprisonment in the county jail not more than six

months, or both. (Now section 53-621, A. C. 1939.)

Sec. 22. SEVERABILITY. If any provision of this act

be held invalid, such invalidity shall not affect other pro-

visions which can be given effect without the invalid pro-

vision, and to this end the provisions of the act are de-

clared to be severable. (Now section 53-622, A. C. 1939.)

LEVER BAAS OLIN RORY POR RAL IL TE TAAL EPMO IES RETR LEAL IIE EL ILE OLSEN S OEP T EE TE

eee

[Key, reading: West Key Number System. ]

First Nat. Ben. Soc. v. STUART.

No. 10231.

Circuit Court of Appeals, Ninth Circuit. March 8,

1943.

As Modified on Denial of Rehearing. April 12, 1943,

1. INTERNAL REVENUE & 2168

In action by a benefit society to recover income taxes

paid, evidence sustained finding that the society did not

maintain reserve for fulfillment of insurance contracts as

required in order to qualify as a life insurance company

within Revenue Act. Rev. Code Ariz. 1928, §§ 607-610;

Revenue Act 1936, § 201, 26 U. S. C. A. Int. Rev. Acts,

p. 898.

2. INTERNAL REVENUE & 826

Where benefit society did not maintain reserve for ful-

fillment of insurance contracts as required by treasury

regulations to qualify as a life insurance company within

Revenue Act, the benefit society was not taxable as a

“life insurance company” but was taxable under Revenue

Act imposing tax on “mutual insurance companies other

than life.” Rev. Code Ariz. 1928, §§ 607-610; Revenue

Act 1936, §§ 201, 207, 26 U. S.C. A. Int. Rev. Acts, pp.

898, 902.

See Words and Phrases, Permanent Edition, for all

other definitions of “Life Insurance Company” and “Mu-

tual Insurance Company Other Than Life.”

LADO TELE RT AE LING EEE OTT LE ELV IIOL SPLIT WE EN EELS SATE IL AY ALE A A RED CO

per Se

3. INTERNAL REVENUE & 153

Treasury regulation requiring the maintenance of re-

serve in order for insurance company to qualify as life in-

surance company within Revenue Act was not objection-

able as illegal legislation where Revenue Act regarding

life insurance companies was originally enacted in 1921

and successive regulations had been substantially similar

since under circumstances congress was taken as having

approved the administrative construction and thereby to

have given it the force of law. Revenue Act 1936, § 201,

26 U.S. C. A. Int. Rev. Acts, p. 898.

4. INTERNAL REVENUE & 157

Revenue Act section defining a life insurance company

as an insurance company engaged in business of issuing

life insurance the reserve fund of which held for fulfill-

ment of contracts comprised more than 50 per cent of its

total reserve fund is ambiguous and justified treasury

regulation regarding reserve which must be kept to qualify

as a life insurance company. Revenue Act 1936, § 201, 26

U.S. C. A. Int. Rev. Acts, p. 898.

~~

Upoa Appeal from the District Court of the United

States for the District of Arizona; Dave W. Ling, Judge.

Action by the First National Benefit Society, a cor-

poration, against W. P. Stuart, Collector of internal re-

venue, to recover income taxes paid. Judgment for

defendant, and plaintiff appeals.

Affirmed.

Robert R. Weaver, of Phoenix, Ariz., for appellant.

Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key,

Samuel H. Levy, Paul R. Hussell, and Louise Foster, Sp.

Assts. to Atty. Gen., and Frank E. Flynn, U. S. Atty., of

Phoenix, Ariz., for appellee.

Before Garrecht, Haney and Healy, Circuit Judges.

Haney, Circuit Judge.

Appellant sought, but was denied, recovery of income

taxes alleged to be illegally exacted from it for the years

1936 and 1937, and appeals from the judgment entered

in favor of appellee.

Appellant was organized under the laws of Arizona on

March 29, 1934, The Articles of Incorporation provide:

“That the objects and purposes for which said Corporation

is formed are: To engage in, conduct and carry on the

business and customary activities of a mutual benefit

association within the meaning and provisions of Sections

607-608-609-610 of Chapter 14 of Article 3 of the 1928

Revised Statutes of the State of Arizona as the same now

exits, © © ™

Appellant's by-laws classify its funds into three classes,

although the distinction between two of them is not clear,

It issues contracts of life insurance. It assesses members

_—

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to procure funds to meet claims under the contracts. Its

financial statements show a very small amount of assets,

but no liabilities. In other words, there was no ordinary

balance statement showing assets and Jéabilities. Thus,

these statements, being only half of the usual balance

statement, disclose no reserves whatever. Such reserves

as are commonly held as representing the value of the life

insurance elements of the policy, are customarily shown as

a liability, but appellant discloses no liabilities.

Appellant did submit operating statements which show

that its receipts were classified into the various funds

mentioned, but while a few show a surplus of receipts over

expenditures, none of them shows that any part of such

receipts were used to set up a reserve fund of any kind.

Those which show a small surplus, the amount is carried

in the “Asset” balance statement as such. Otherwise, the

operating statements disclose that all receipts were used

to pay claims and expenses. In its income tax returns

for 1936 and 1937, appellant reported no tax liability but

attached to the returns the statement that “The entire

income consists of amounts collected from members for

the sole purpose of meeting losses and expenses.”

The Commissioner of Internal Revenue audited the

returns and assessed tax deficiencies for both years on the

theory that appellant was not a life insurance company

within the meaning of § 201 of the Revenue Act of 1936,

26 U. S. C. A. Int. Rev. Acts, page 898, and it was

therefore taxable under § 207 of that act. Appellant paid

the tax, claimed a refund, and after denial of its claims

brought this action to recover the tax paid. The court

below found that appellant did not voluntarily keep, and

no statute, rules or regulations promulgated in the exer-

EN ORPER, NRS OPE OS ONT DAE SA PTET TT RE IT

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cise of a power conferred by statute required it to keep,

Ss

a reserve fund for the fulfillment of its insurance con-

tracts. The court below concluded that appellant was not

a life insurance company within the meaning of 3 201 of

the Revenue Act of 1936, and entered judgment for ap-

pellee. This appeal followed.

Appellant contends that it is not taxable because it is

a life insurance company within the meaning of § 201

of the Revenue Act of 1936 which defines what is meant

in that part of the act by the term “life insurance com-

‘ pany” as “an insurance company engaged in the business

of issuing life insurance and annuity contracts * * *

the reserve funds of which held for the fulfillment of

such contracts comprise more than 50 per centum of its

total reserve funds.”

Art. 201 (a)-1l, Treasury Regulations 94, provides that

“no reserve shall be regarded as held for the fulfillment

of an insurance contract unless it conforms to the de-

finition of ‘reserve’ contained in article 203(a) (2)-1.”

The latter article provides in part as follows: “In general,

the reserve contemplated is a sum of money, variously

computed or estimated, which, with accretions from in-

terest, is set aside (reserved) as a fund with which to

mature or liquidate, either by payment or reinsurance with

other companies, future unaccrued and contingent claims.

It must be required either by express statutory provisions

or by rules and regulations of the insurance department of

a State, Territory, or the District of Columbia when

ERNE LOTR ELL OL IY LAI TE Ie AEN AR TINE EER FTE CET IS ERM _—

ba Pat ie belted bald

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promulgated in the exercise of a power conferred by

mime. 7

“* * * A company is permitted to make use of the

highest aggregate reserve called for by any State or Terri-

tory or the District of Columbia in which it transacts

business, but the reserve must have been actually held.

** *

{1, 2] Appellant contends that the finding of the court

below, that it maintained no reserve for the fulfillment of

insurance contracts, is not sustained by the evidence.

We think the finding is the only one possible under the

evidence. The evidence goes no further than to show that

appellant classified its income, but classifying income is

not maintaining a reserve. Likewise, a requirement of

the by-laws requiring maintenance of reserves does not

show that appellant maintained such reserves.

[3, 4] The statute, itself, does not expressly require a

reserve before a company can be considered a “life in-

surance company.” Likewise it does not say that if re-

serves are kept, they must be of the kind which are re-

quired by statute. However, the statute does not provide

to the contrary either. The regulations require a reserve,

and the kind of reserve specified by the state statutes or

regulations promulgated thereunder. Appellant argues

that the regulations, in so defining, if not limiting, the

scope of the statute, have illegally legislated by changing

the classification of tax payers. It is not argued that

Congress could not have done what the regulations did,

but it is argued that Congress has not done so,

| ena ALISON INGA ARE INDY ETE LAREN WE ee IT EN HS

ellis

The statute as quoted above was originally enacted in

1921. It has existed since without change. The successive

regulations have been substantially similar. Under these

circumstances “Congress must be taken to have approved

the administrative construction and thereby to have given

it the force of law.” Helvering v. Raynolds Co., 306 U.

S. 110, 115, 59 S. Ct. 423, 426, 83 L. Ed. 536. See, also,

Helvering v. Winmill, 305 U. S. 79, 83, 59 S. Ct. 45, 83

L. Ed. 52, and cases cited in note 7. Appellant maintains

that the statute is unambiguous, and that it comes within

its plain terms, and therefore the regulations cannot limit

the statute. We do not regard the statute as unambiguous,

The statute itself certainly does not make it clear whether

wny reserve must be kept, and it does not make it clear

that if reserves are kept they must or must not be of the

kind required by state law to be kept. While it might

be possible to look at various provisions of the act and its

legislative history, and thus determine what Congress

should have meant in logic, we are not determining what

Congress should have meant, but what it actually meant.

Affirmed.

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-

In the United States Circuit Court of Appeals for the

Ninth Circuit.

First National Benefit Society, a corporation, Appellant,

vs. W. P. Stuart, Collector of Internal Revenue, Appellee.

No. 11,039. Dec. 11, 1945.

Appeal from the District Court of the United States

for the District of Arizona.

Before GARRECHT, Matnews and Heaty, Circuit

Judges. Matuews, Circuit Judge.

For the calendar year 1938, appellant filed an income

tax return which disclosed no income nor any income tax

liability. The Commissioner of Internal Revenue deter-

mined that appellant was a mutual insurance company

(other than a life insurance company ) within the meaning

of § 207(a) of the Revenue Act of 1938," 26 U. S.C. A.

Int. Rev. Acts, p. 1092, and hence was taxable under that

section, and that it had special class net income of $10,-

139.48 in 1938 and hence owed a tax of $1,673.01 (164%

of $10,139.48). The tax was assessed by the Commis-

sioner and was collected by appellee, Collector of Internal

Revenue for the District of Arizona. A claim for refund

was duly filed with the Commissioner. No decision thereon

having been rendered within six months from the date of

such filing, appellant brought a suit against appellee for

the recovery of the tax.’ Appellee answered, trial was

1Section 207(a) provides: “There shall be levied, collected, and

paid for each taxable year upon the special class net income of

every mutual insurance company (other than a life insurance com-

pany) a tax equal to 16% per centum thereof.” For the meaning

of the term “special class net income,” see § 14(a) of the Revenue

Act of 1938, 26 U. S. C. A. Rev. Acts, p. 1006.

226 U. S. C. A. Int. Rev. Code, § 3772.

E oe ital —— or a TPR Aad Wh RATA EY AE CIE PME LIM GIG BIEL AS AE

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—50—

had, findings of fact and conclusions of law were stated,

and judgment was entered in favor of appellee. From that

judgment this appeal is prosecuted.

Appellant alleged, in substance and effect, that it was

a life insurance company within the meaning of § 201(a)

of the Revenue Act of 1938,* 26 U. S. C. A. Int. Rev.

Acts, p. 1087, and hence was not taxable under § 207(a).

Appellee denied that appellant was a life insurance com-

pany within the meaning of §201(a). On this issue,

appellant had the burden of proof.* Thus appellant had

the burden of proving that it was engaged in the business

of issuing life insurance and annuity contracts, and that

its reserve funds held for the fulfillment of such contracts

comprised more than 50% of its total reserve funds.® The

burden was not sustained. The court properly concluded

that appellant was not a life insurance company within

the meaning of § 201(a).°

8Section 201(a) provides: “When used in this title [§§ 1-373

of the Revenue Act of 1938, 26 U. S. C. A. Int. Rev. Acts, pp.

1001-1129] 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 ful-

fillment of such contracts comprise more than 50 per centum of its

total reserve funds.”

‘United States v. Anderson, 269 U. S. 422; United States v.

Mitchell, 271 U. S. 9; Botany Worsted Mills v. United States, 278

U. S. 282; Reinecke v. Spaulding, 280 U. S. 227; McLaughlin v.

Pacific Lumber Co., 293 U. S. 351; Welch v. St. Helens Petroleum

Co., 9 Cir., 78 F. 2d 631; Obispo Oil Co. v. Welch, 9 Cir., 85 F.

2d 860; Parrott Estate Co. v. McLaughlin, 9 Cir., 89 F. 2d 189;

Maloney v. Western Cooperage Co., 9 Cir., 103 F. 2d 992; United

States v. Trust No. B. I. 35, 9 Cir. 107 F. 2d 22; Powell v. United

States, 9 Cir., 123 F. 2d 4572; Cranson v. United States, 9 Cir.,

146 F. 2d 871.

5See footnote 3.

®Cf. First National Benefit Society v. Stuart, 9 Cir., 134 °F. 2d

438.

ae

—si—

Appellant alleged, in substance and effect, that, if tax-

able under § 207(a), it was entitled to a deduction under

§ 207(c)(3) of the Revenue Act of 1938,’ 26 U. S.C. A.

Int. Rev. Acts, pp. 1092, 1093. Appellee denied that ap-

pellant was entitled to any such deduction. On this issue,

appellant had the burden of proof.* Thus appellant had

the burden of proving that its members were required to

make premium deposits to provide for losses and expenses

and that some amount thereof was returned to its policy-

holders or was retained for the payment of losses, expenses

and reinsurance reserves.” The burden was not sustained.

The court properly concluded that appellant was not en-

titled to a deduction under § 207(c)(3).

Judgment affirmed.

7Section 207(c) provides:

“(c) Deductions.—In addition to the deductions allowed to corpo-

rations by section 23 the following deductions to insurance com-

panies shall also be allowed, unless otherwise allowed—

“(3) Mutual insurance companies other than life and marine.

—In the case of mutual insurance ‘companies (including inter-

insurers and reciprocal underwriters, but not including mutual life

or mutual marine insurance companies) requiring their members to

make premium deposits to provide for losses and expenses, the

amount of premium deposits returned to their policyholders and

the amount of premium deposits retained for the payment of losses,

expenses, and reinsurance reserves.”

8See cases cited in footnote 4.

See footnote 7.

(Endorsed.) Opinion. Filed Dec. 11, 1945. Paul P.

O’Brien, Clerk.

ad aia 4 NE SEIS Ee Se es

Service of the within and receipt of a copy

thereof is hereby admitted this day of

April, A. D. 1946.

age!

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SRI LOPE ABE EOS I A SPLOT

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