Pickering v. Alyea-Nichols Co.

21 F.2d 501, 1 U.S. Tax Cas. (CCH) 247, 6 A.F.T.R. (P-H) 6976, 1927 U.S. App. LEXIS 2736

• Court: Court of Appeals for the Seventh Circuit
• Decided: July 22, 1927
• Docket: 3820, 3821
• Status: Published

Opinion

ALSCHULER, Circuit Judge-

(after stating the facts as above). As to the facts there is no controversy. The taxes in question were assessed by the "Internal Revenue Commissioner, and on his imperative demand paid by or through defendant in error as agent, attorney in fact, or trustee, and in the same capacity it seeks refund. Under the circumstances it alone could and did produce the funds required to pay these taxes, and if they were unlawfully levied the government is in no position to narrowly question the right of defendant in error to maintain the suits for refund; and its contention that defendant in error has no right or title to maintain the suits is not sustained. " -

For defendant in error it is contended that even if the government was entitled to the taxes — especially the policy -issuance tax — it was not entitled to them from the’ Belt Automobile Indemnity Association, in which name the assessment was made, and that therefore the assessment and' collection were void. Passing the government’s contention that no assessment was necessary, we are not impressed by the force of the suggestion that the name in which the assessment was made did not indicate who was, in fact, the taxpayer. If the taxes were payable, and were paid, it is of small concern whether the correct name or capacity was employed. Names alone cannot serve to change actual conditions or to defeat lawful rights.

Tax on issuance of insurance policies constitutes the large bulk of the demand in each case. Section 504 of the Revenue Act of 1917 provides for levy and collection of “the following taxes on the issuance of insurance policies: * * * (c) Casualty Insurance. A tax equivalent to 1 cent, on each dollar or fractional part thereof of the premium charged under each policy of in surance or obligation of the nature of indemnity for loss,’ damage, or liability * * * issued or executed or renewed by any person, corporation, partnership, or association, transacting the business of * * * automobile, or other branch of insurance. * * * ”

Section 505 (Comp. St. § 6999y¿i) makes provision for “every person, corporation, partnership, or association, issuing policies of insurance upon the issuance of which a tax is imposed by section 504” to make monthly return of and pay such tax. The Revenue Act of 1918, in somewhat different arrangement and wording, is to same effect.

Apart from the exception in case of insurance by fraternal societies having lodges, and the like, the sections are all-inclusive, and the only question respecting these policy taxes is whether this concern falls within them. It is the contention of defendant in error that “Belt Automobile Indemnity Association” indicated merely a place, and that the “subscribers” constituted neither a corporation, association, nor- insurance company, nor body of any kind, and much of the briefs on both sides is devoted to the proposition whether or not this is an association. The many cases cited on the subject of what does or does not constitute an association within the meaning of various statutes of different states, are not particularly helpful here. We are of opinion that the Revenue Act does not employ the term in any narrow or technical sense. It is defined in Black’s Law Dictionary: “The act of a number of persons who unite or join together for some special purpose or business, The union of a company of persons for the transaction of designated affairs, or the attainment of some common object. An unincorporated society.” And in 1 Bouv. Law Diet. 269: “The act of a number of persons in uniting together for some purpose. The persons so joining.”

If, in the transaction of this business, the subscribers were associating, or coacting, or co-operating in any way to carry it on, they constituted an association, within the meaning of the act; and this quite regardless of what, as between themselves, or between them and their attorney in fact, the contractual or financial or bookkeeping arrangements were. Without such coaction or co-operation it is more than apparent this large business could not have been created. The statement sets out quite fully the instruments whereunder the subscribers are acting through their “attorney in fact.”

Let us assume there are say 50,000 subscribers in this so-called “exchange.” It would be a practical-impossibility for each to act for himself. There must not only be a common plan, but a co-ordinating agency. If each of the 50,000 undertook to make with the others such indemnity contract as he saw fit, each unrelated to the other, and without preconcerted uniformity of purpose and plan, nothing could possibly have been achieved. If all should meet together and agree upon a plan and carry it out through successive meetings, there would clearly be an association of the individuals. If each one constituted a different person as his attorney in fact, to act for him in the matter of granting and receiving indemnity, and these co-operate accordingly, the various attorneys, for their principals, would be associated for such purpose and it would be an association of individuals acting through their attorneys.

Is it< any the less an association if each subscriber appoints and constitutes the same person as his attorney in fact, and the business is conducted through this attorney,? He is none the less the agent for each of the others, and it is they, through the attorney, who are agreeing upon the form of application and power of attorney, and of the contract of' indemnity, and all of the various steps and acts necessary to build up such comprehensive and extensive business of insurance. The fact that the attorney is the same in each case makes it none the less an association of the various principals acting through the attorney. Through this attorney the principals cohere in the inauguration and continuance of the common plan, to which each of the subscribers is committed by his application, power of attorney, and contract of indemnity. New subscribers become part of the association.

To constitute an association within the meaning of the act, it is not requisite that each constituent should be coordinate or hold the same relation. A very important and indispensable element here is the so-called attorney in fact, who is not merely and simply an attorney in fact as ordinarily understood. With the attorneyship there is coupled a decided interest which permeates and colors the entire plan. It is the attorney who in practice and by contract inspires and dominates it, and around whom the business is built. His power is irrevocable. He is not removable, and his power of substitution is limited only by a veto of a so-called “advisory committee,” which the subscribers annually choose, and which has practically no other material function save that investment of funds by the attorney is with the advice and consent of the committee. The .attorney has absolute power over who may be accepted as subscribers; what the rates of indemnity shall be; what the subscribers must pay from time to time (limited, presumably, by the necessities of the concern); the cancellation of contracts, and thus the ending of the subscriber’s relation; the settlement and payment of losses, compromise of claims; and, in practical effeet, every power of a corporate board of directors, plus many important powers which such boards do not have.

The attorney receives for his services in his controlling capacity of permanent and irremovable manager of the concern, from each subscriber on his application for insurance, whereby on acceptance he becomes a subscriber, $7.50 for each one of the three classes of insurance which may be applied for. This is an “appliealion fee.” lie also receives $1 for each transfer of the insurance to another automobile of the same owner; also 10 per cent, of all assessments or premiums or deposits by the subscriber, under whatever name made. True, the expenses of the office, and of obtaining the insurance are paid therefrom; but the losses, expense of investigation, attorney’s fees, and all other expense, including taxes, are paid from the 90 per cent.

It is thus apparent that this functionary is far more than an attorney in fact. Ho is the very pulsating heart of the concern, the subscribers supplying the blood. This is not said in derogation of the organization or of the plan, with the merits or demerits of which we are not concerned. It has evidently thus far proved successful — at least in the numbers of such organization in the many states which have authorized them, as well as in the number of subscribers — and for the purpose hereof its merit may be assumed. These conditions are pointed out to indicate that the subscribers and the so-called attorney are all co-operating together to make possible this result, all constituting an association without which the business would not exist. From what appears we are satisfied this concern falls fairly within the designation of “association” as employed in the act which imposes the tax.

But it is not essential that this thing be classified as an association in order to subject to tax its issuance of insurance policies. The statute also says “person.” This, of course, includes the plural; and if these persons, whether or not technically constituting an association, issue insurance policies, whether unto themselves or to others, the tax is payable. So, if we treat all the participants as persons transacting the business, the act subjects them to the tax.

Perhaps what has been said sufficiently answers the earnest contention which defendant in error makes that Belt Automobile Indemnity Association is but the name of the place where the business is transacted, and in no sense the name of an organization or association of the subscribers; but again we say that the name is not material. The right to tax does not depend upon the name. The taxable concern may have any name, or no name at all. The Illinois statute of 1921 (section 3) on the subject of interinsuranee requires that there be “a name of, or designa tion under which such contracts are to be issued,” and if the name indicated is not the name of this concern, it has no name. That a name would be a great convenience, and, indeed, is almost indispensable, is apparent from a reading of the instruments set out in the statement, where the concern is repeatedly designated as “Belt Automobile Indemnity Association” or “association” without any reference to a place. At the very beginning of the power of attorney it is stated, “Association will not accept application,” etc., and the contract is replete with references to what the association will and will not do, concluding with the statement that notice to an agent is not notice to the association.

It is further urged that the subscribers were each extending insurance to the others; that those are separate, individual transactions, in no way connected; and that what is paid by each subscriber is not a premium but an advance deposit against which is charged, from time to time, the subscriber’s proportion of expense of the business and all losses paid to subscribers. The contention is, in effect, that each subscribía' issues say 50,000 separate, several, and distinct contracts of indemnity, for the fifty-thousandth part of the loss (if the policies and indemnity were all alike) accruing to any one subscriber, and that at most the individual alone would be liable for the tax on his separate undertaking. This might have force if, in practice, the policies were so issued and premiums and losses paid.

But such is far from the fact. There is collected in advance a premium equal to the estimated cost to the subscriber of carrying the insurance for a stated period, and as this advance is used to pay losses and expenses, another premium is levied and collected for another stated period. If more is required more is, from time to time, demanded; if less is needed, the demands are less. The amount is fixed by the controlling factor, the attorney, and if not paid the insurance ceases, and the relations of the subscriber are terminated. When a loss occurs the attorney alone adjusts it and pays it in a lump sum out of the accumulated funds in his hands. Investments are made by the attorney, and reserves maintained out of the funds not immediately required, and from all outward indications the» business is. run by. the so-called attorney in fact in the same general way as any large business would be run. either by a corporation or by individuals,

Indeed, in the issuance of policies and collection of premiums there is no great difference in. principle .between this and insurance of the most orthodox type. Premiums in the latter, it is true, are fixed, and there is an absolute assumption of liability, usually by a corporation, or it may .be under some mutual.form. But in the last analysis it is the premiums out of which the expenses and losses are paid; otherwise the .concern must eventually, quit. The fact’that the business is or is not conducted for profit is of no importance on the proposition'of-taxation.

The utter impracticability of the 50,000 each undertaking independently to indemnify each of the others, is so apparent as to dispel the conclusion that each subscriber is independently. and unqualifiedly the indemnifier of all. Whatever the plan of bookkeeping may be, the premiums are paid in and received in their entirety, banked, invested, or otherwise held as a whole, and losses, expenses and other disbursements undividedly paid without action by or-reference to the subscribers, individually or collectively, or contributed by them other than their payment of premiums.

Asserting that the contract is but the individual, undertaking of each subscriber; and that the subscriber is not “transacting the business of, automobile insurance,” the claim is made that therefore no tax accrued. It goes without saying that in the placing of this indemnity, involving in a few years several millions of dollars of premiums, a large business of insurance has been transacted, and some person, association, or corporation has transacted it and actually issued the policies and received the premiums. If the cooperative subscribers1 and the attorney have contrived to carry on and build up this very large business of insurance, and to issue these thousands of policies, the tax thereon may not be avoided on the plea that the participation of each subscriber was so slight that he eannot be said to have transacted the business of insurance. 1

It is upon the issuance of the policy, or contract of indemnity, that the tax is imposed, the amount being measured by the premium paid. The policy or contract of indemnity was issued as an entirety by the central agency, and thus fixed the liability to taxation for issuance under the Revenue Act, and the amount of the tax payable was fixed by the premiums which were received through the same agency.

We find no merit in the contention that these are not premiums, but mere advance deposits to insure payment of the subscriber’s share of losses and expenses. This is, in effect, the basis of all insurance in one form or another, which is to distribute among the many the burden of losses accruing to the few. The liability to tax for issuance of the policy in no measure depends, upon, the time when the premium is paid,, whether, by way of advance deposit before the loss, or collected after loss occurs. It is payment made in consideration of the indemnity afforded, and is, in every fair sense, premium as that term is understood. ’

The power of attorney itself. authorizes the attorney to pay “taxes” out of.the premium receipts; presumably all lawful taxes; whether on the accumulated funds or property in the attorney’s hands, or excise taxes such as might be levied on the issuance of policies; and presumably not taxes on 50,-000 individuals, each on his individual contract to indemnify each or all of them. Even though the tax, when paid, would be apportioned among the several subscribers, its initial payment by the attorney was evidently contemplated by all concerned.

What has been said applies likewise to the other items in issue — income tax-aggregating $1,309.79, and capital stock tax, $174 (both without interest). The income-tax was on interest from the investments of the premium receipts and reserves, and- the capital stock tax was on items on which, under the Revenue Law, an association would have been subject to the tax. ■- ■

The judgment is reversed, and the cause remanded to the District Gourt for further proceedings in harmony with these views. •