Cooperative Ins. v. Commissioner (A) , 41 B.T.A. 1151 ( 1940 )

COOPERATIVE INSURANCE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Cooperative Ins. v. Commissioner (A)

Docket No. 95292.

United States Board of Tax Appeals

41 B.T.A. 1151; 1940 BTA LEXIS 1095;

May 15, 1940, Promulgated

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Three corporations authorized, by permission granted annually, to act as self-insurers under the Workmen's Compensation Law of Pennsylvania, designated a joint agency operated by them under the name of Cooperative Service to administer their respective liabilities under the law. Petitioner was designated a department of Cooperative Service. It collected each year from the corporations premiums computed under the Workmen's Compensation Law and deposited them in a fund, out of which compensation, also computed under the law, to employees for injuries, and expenses were paid for the account of the self-insurers. Held, that petitioner was not an association taxable as a corporation.

J. Howard Reber, Esq., Clarence L. Turner, Esq., Ellsworth C. Alvord, Esq., and Floyd Toomey, Esq., for the petitioner.

Brooks Fullerton, Esq., C. L. Orpin, C.P.A., Murray Raffe, C.P.A., and A. O. Barth, C.P.A., for the respondent.

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DISNEY

This proceeding involves the redetermination of the deficiencies in income and excess profits taxes and delinquency penalties in the following amounts for the years 1919 to 1935, inclusive:

Year	Income tax	Delinquency penalty
1919	$32.27	$8.07
1920	3,948.43	987.11
1921	3,213.15	803.29
1922	1,999.38	499.85
1923	2,238.78	559.70
1924	2,223.79	555.95
1925	3,770.17	942.54
1926	5,468.21	1,367.05
1927	5,348.74	1,337.19
1928	6,789.90	1,697.48
1929	7,999.63	$1,999.91
1930	6,864.27	1,716.07
1931	5,327.30	1,331.83
1932	4,769.11	1,192.28
1933	4,789.17	1,197.29
1933	1 1,741.52	435.38
1934	5,740.01	1,435.00
1934	1 2,087.28	521.82
1935	6,024.30	1,506.08
1935	1 2,190.66	547.67

Fraud penalties asserted for the years 1924 to 1935, inclusive, were abandoned by the respondent at the hearing. The issue is whether the petitioner is an association taxable as a corporation. From the stipulation of facts, testimony, and documentary evidence we make the following findings of fact.

FINDINGS OF FACT.

The Textile Machine Works, hereinafter referred to as Textile, is engaged in the manufacture and sale of knitting and braiding machines and parts thereof and the operation of a general machine shop and foundry. The Berkshire Knitting Mills, hereinafter referred to as Berkshire, is engaged in the manufacture and sale of hosiery. The Narrow Fabric Co., hereinafter referred to as Fabric Co., is engaged in the manufacture and sale of ribbons, binding tape, and similar products. Textile, Berkshire, and Fabric Co., hereinafter referred to collectively as the three corporations, are Pennsylvania corporations having adjacent plants at Wyomissing, Pennsylvania.

At all times material Textile and Berkshire kept their books and filed their income tax returns on the accrual basis and on the basis of a fiscal year ending April 30. The Fabric Co. kept its books and filed its income tax returns on a like basis and on the basis of a calendar year.

The three corporations have at all times important maintained a joint undertaking known as "Co-operative Service." Its activities consisted, in addition to those of petitioner, of welfare work, the maintenance of a dispensary for medical, dental, and ocular service, and promoting recreational activities. Small charitable contributions of the three corporations were made by Co-operative Service, and its dispensary and library were available to their employees. The employees of Co-operative Service consisted of an accountant, who, with the assistance of a clerk, administered Co-operative Service, a staff of three doctors, an "eye man" and a librarian. The salaries of the employees were paid out of funds in a bank account designated Co-operative Service. The accountant acted under the supervision of, and was accountable to, representatives of the three corporations, who determined all questions of policy affecting Co-operative Service. No part of the accountant's salary was paid by petitioner.

Prior to March 1, 1918, each of the three corporations qualified separately to act as self-insurers under the Pennsylvania Workmen's Compensation Law. On March 1, 1918, the three corporations entered into an oral agreement for the mutual sharing of losses and expenses resulting from their respective liabilities as self-insurers under the Pennsylvania Workmen's Compensation Law. Pursuant to the agreement they established, for administration as a department of Co-operative Service, a fund designated as Cooperative Insurance, the petitioner herein, to which each of the corporations made deposits based upon the recognized rates of compensation insurance for the various occupations of their respective employees and for which there has at all times material been maintained a separate bank account under the name of "Cooperative Service, Insurance Department." The petitioner never qualified as an insurer before the Pennsylvania Department of Insurance and was never engaged in the insurance business in Pennsylvania. The Cooperative Power Plant and Delta Store participated in the plan, the former in all of the taxable years except 1919 and the latter from 1928 to 1935, inclusive. The corporations could have withdrawn their participation in the plan at any time without previous notice.

The petitioner in conducting correspondence used letterheads reading, in part:

CO-OPERATIVE SERVICE

Operated by

TEXTILE MACHINE WORKS

THE NARROW FABRIC CO.

BERKSHIRE KNITTING MILLS

At times the words "Insurance Department" or "Insurance Division" were typed on the letter paper.

The books and records of petitioner were kept on the accrual basis and on the basis of a calendar year, on which basis the three corporations computed their premium deposits. The books were physically located in the office of Textile, where the administrator of Co-operative Service had his office.

Prior to 1925 the books of account for the insurance fund were kept as though the three corporations were self-insurers and mutual insurers. Under this method compensation paid for injuries of individual employees was charged against the account of the employer corporation, and expenses incurred were prorated among, and charged to, the three corporations on the basis of awards made to their respective employees. Income from investments made of funds in the reserve account was credited to a reserve account. No part of the reserve was used to pay compensation for injuries or incidental expenses.

In 1925 the books of account for the insurance fund were reconstructed as of December 31, 1924, to accord with the method prescribed by the Workmen's Compensation Law of Pennsylvania for employers' mutual liability insurance associations. In reconstructing the accounts in accordance therewith, total compensation paid for injuries and incidental expenses each year were charged to total premium payments and other income of that year. There was also charged to premium payments and credited to an account designated "Reserve Required of Mutual Insurance Companies by Pennsylvania Law" 65 percent of the earned premium payments for the prior three years. The balance was transferred to an account called "Reserve for Catastrophes." The balances in the reserve accounts were allocated to the participating members on the basis of premiums paid for the period. Funds in the reserve accounts of petitioner were invested in securities. The representatives of the three corporations determined the investments.

Injuries sustained by employees were reported to petitioner by the employer concerned with the accident on forms prescribed by the State of Pennsylvania and used by all insurers under the Workmen's Compensation Law. Thereafter the claims were handled by petitioner, including the rendition of necessary reports to State officials and the payment of compensation and hospital and medical charges. The petitioner performed no other service. Compensation to employees for injuries was paid from the insurance fund. The premium deposits of the three corporations were made for the sole purpose of paying the costs of administering the fund, including compensation to employees for injuries sustained.

During the taxable years the premium receipts, other income, transfers to the 65 percent reserve account, and the claims and expenses of the insurance fund were as follows:

Year	Deposits	Other income	Transfers to reserve	Claims and expenses
1919	$4,012.43	$26.40	$2,608.08	$1,716.05
1920	20,245.59	78.90	13,159.64	3,580.09
1921	18,078.84	583.02	11,751.25	4,543.47
1922	18,938.46	1,383.52	9,701.92	2,326.93
1923	19,640.85	2,200.05	1 (393.08)	1,930.63
1924	17,431.45	3,633.08	1 (420.81)	1,274.18
1925	26,630.53	5,247.54	4,999.84	2,876.78
1926	38,950.25	5,620.05	12,551.10	4,065.05
1927	35,676.59	8,964.68	11,859.34	5,021.00
1928	53,179.02	11,202.50	17,256.52	7,799.01
1929	71,048.97	10,385.48	20,864.17	8,710.53
1930	48,302.48	13,450.85	8,206.83	4,551.07
1931	34,463.34	13,274.20	1 (12,165.19)	3,343.34
1932	26,365.12	11,166.19	1 (29,044.50)	2,846.89
1933	30,120.45	8,137.66	1 (11,818.32)	3,427.81
1934	40,137.71	5,308.23	3,688.34	3,700.39
1935	42,471.09	5,490.81	10,468.88	4,148.79
Total	545,693.17	106,153.16	73,274.01	65,862.01

The amount of claims and expenses paid each year for the account of the participating members was less than the premiums charged the respective members. The excess of receipts over expenses and transfers to the 65 percent reserve account each year from 1919 to 1926, inclusive, totaling $106,429.84, was transferred to an account designated catastrophe reserve. The excess amount each year thereafter, aggregating $406,280.47, was refunded yearly as it accrued to the participating members in proportion to the premiums paid in for the preceding three years. Excepting a refund of $115 in 1925 for commissions and net gain of $780.31 on the sale of securities during the years 1925 to 1935, inclusive, all of the receipts of the insurance fund from other than premium collections were derived from interest on bank balances, bonds, and other securities. Disbursements were made from the catastrophe reserve account each year, commencing in 1928, to the three corporations for retirement of aged employees and relief of indigent employees. The balance in the account at the close of 1935 was $50,980.83. All of the premiums paid into the insurance fund were deducted as expenses, and refunds were reported as income in income tax returns of the three corporations. No income tax returns were ever filed by or on behalf of petitioner.

OPINION.

DISNEY: The principles governing the question involved are set forth in , decided this day, in which the three corporations were involved, and need not be restated. Petitioner contends that it was nothing more than a joint account, operated as a department of Co-operative Service, through which the three corporations administered their agreement jointly to share loss resulting from their respective liabilities as self-insurers. The respondent argues that throughout the taxable years petitioner was "engaged actively in a large business enterprise."

No formal agreement was entered into for the creation or operation of petitioner. Enterprises to conduct business for profit are generally formed with more formality than an oral agreement, especially when the participants are corporations. Petitioner was not qualified to act as an insurer and the authority of the participating corporations was limited to self-insurers under the Workmen's Compensation Law of Pennsylvania. Petitioner administered only the liabilities of the respective corporations as self-insurers of their employees under the law. Reports to the state authorities of injuries were made by the employer corporation through the facilities of petitioner and the agreements entered into for compensation were between the employer and employee. Such acts as petitioner performed were not as principal, but as agent for the insuring corporation. No profit was contemplated. The contributions to the joint arrangement were fixed by state statute and the liability for injuries sustained by employees of the participants was also regulated by law. An undertaking so restricted may not be said to be a business operated for profit. The participants had no investment in the undertaking analogous to stockholders of corporations. The income from investments of reserve funds was incidental and not a primary object of the plan. The amount paid out by petitioner for the account of the respective participants was less each year than the deposit made by it for that purpose.

No provision was made for the issuance of certificates of beneficial interest or the introduction of additional members. Neither did the participants provide for assignment of their interests or for a definite life for the joint plan. The participating corporations could have withdrawn their participation at any time and the withdrawal of any two of the corporations would have terminated the undertaking. Thus the plan lacked the continuity found in corporate organizations.

There was no administration of the fund by individuals analogous to a board of directors or shareholders. The situation here in that respect is not materially different from the Cooperative Power Plant case. Neither was there limitation of liability similar to stockholders of corporations. The petitioner was simply a joint agency designated by the three corporations to administer their respective liabilities as self-insurers under the Workmen's Compensation Law of Pennsylvania. Its resemblance to a corporation is not sufficient to classify it as an association taxable as a corporation. Accordingly,

Decision will be entered for the petitioner.

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Footnotes

• 1. Excess profits tax. ↩

• 1. Reserve restored to income accounts. ↩