252 U.S.

523
40 S.Ct. 397
64 L.Ed. 698

PENN MUT. LIFE INS. CO.

v.
LEDERER, Collector of Internal Revenue.
No. 499.
Argued March 22 and 23, 1920.
Decided April 19, 1920.

Mr. George Wharton Pepper, of Philadelphia, Pa., for petitioner.

Mr. Assistant Attorney General Frierson, for respondent.
Mr. Justice BRANDEIS delivered the opinion of the Court.

The Penn Mutual Life Insurance Company, a purely mutual legal reserve
company which issues level premium insurance, brought this action in the
District Court of the United States for the Eastern District of Pennsylvania to
recover $6,865.03 which was assessed and collected as an income tax of 1 per
cent. upon the sum of $686,503, alleged to have been wrongly included as a
part of its gross income, and hence also of its net income, for the period from
March 1, 1913 to December 31, 1913. The latter sum equals the aggregate of
the amounts paid during that period by the company to its policy holders in
cash dividends which were not used by them during that period in payment of
premiums. The several amounts making up this aggregate represent mainly a
part of the so-called redundancy in premiums paid by the respective policy
holders in some previous year or years. They are, in a sense, a repayment of
that part of the premium previously paid which experience has proved was in
excess of the amount which had been assumed would be required to meet the
policy obligations (ordinarily termed losses) or the legal reserve and the
expense of conducting the business.1 The District Court allowed recovery of
the full amount with interest. 247 Fed. 559. The Circuit Court of Appeals for
the Third Circuit, holding that nothing was recoverable except a single small
item, reversed the judgment and awarded a new trial. 258 Fed. 81, 169 C. C. A.
167. A writ of certiorari from this court was then allowed. 250 U. S. 656, 40

Sup. Ct. 14, 63 L. Ed. 1192.

2

Whether the plaintiff is entitled to recover depends wholly upon the

construction to be given certain provisions in section II, G(b), of the Revenue
Act of October 3, 1913, c. 16, 38 Stat. 114, 172, 173. The act enumerates
among the corporations upon which the income tax is imposed 'every insurance
company' other than 'fraternal beneficiary societies, orders, or associations
operating under the lodge system or for the exclusive benefit of the members of
a fraternity itself operating under the lodge system.' It providesG(b), pp. 172174 how the net income of insurance companies shall be ascertained for
purposes of taxation, prescribing what shall be included to determine the gross
income of any year, and also specifically what deductions from the ascertained
gross income shall be made in order to determine the net income upon which
the tax is assessed. Premium receipts are a part of the gross income to be
accounted for.

In applying to insurance companies the system of income taxation in which the

assessable net income is to be ascertained by making enumerated deductions
from the gross income (including premium receipts) Congress naturally
provided how, in making the computation2 , repayment of the redundancy in the
premium should be dealt with. 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, while in a stock company they
may be met from the capital stock subscribed. 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 policy holder. Some payment to the policy
holder representing such excess is ordinarily made by every mutual company
every year; but the so-called repayment or dividend is rarely made within the
calendar year in which the premium (of which it is supposed to be the unused
surplus) was paid. Congress treated the so-called repayments or dividends in
this way (page 173):

(a) Mutual fire companies 'shall not return as income any portion of the
premium deposits returned to their policy holders.'

(b) Mutual marine companies 'shall be entitled to include in deductions from

gross incoe amounts repaid to policy holders on account of premiums
previously paid by them and interest paid upon such amounts between the
ascertainment thereof and the payment thereof.'
(c) Life insurance companies (that is both stock and strictly mutual) 'shall not

(c) Life insurance companies (that is both stock and strictly mutual) 'shall not
include as income in any year such portion of any actual premium received
from any individual policy holder as shall have been paid back or credited to
such individual policy holder, or treated as an abatement of premium of such
individual policy holder, within such year.'

(d) For all insurance companies, whatever their field of operation, and whether
stock or mutual, the act provides that there be deducted from gross income 'the
net addition, if any, required by law to be made within the year to reserve funds
and the sums other than dividends paid within the year on policy and anunity
contracts.'

The government contends, in substance, for the rule that in figuring the gross
income of life insurance companies, there shall be taken the aggregate of the
year's net premium receipts made up separately for each policy holder.3 The
Penn Mutual Company contends for the rule that in figuring the gross income
there shall be taken the aggregate full premiums received by the company less
the aggregate of all dividends paid by it to any policy holder by credit upon a
premium or by abatement of a premium and also of all dividends whatsoever
paid to any policy holder in cash, whether applied in payment of a premium or
not. The noninclusion clause (c), above, excludes from gross income those
premium receipts which were actually or in effect paid by applying dividends.
The company seeks to graft upon the clause so restricted a provision for what it
calls nonincluding, but which in fact is deducting, all cash dividends not so
applied. In support of this contention the company relies mainly, not upon the
words of the statute, but upon arguments which it bases upon the nature of
mutual insurance, upon the supposed analogy of the rules prescribed in the
statute for mutual fire and marine companies and upon the alleged requirements
of consistency.

First. The reason for the particular provision made by Congress seems to be
clear: Dividends may be made, and by many of the companies have been made
largely, by way of abating or reducing the amount of the renewal premium.4
Where the dividend is so made the actual premium receipt of the year is
obviously only the reduced amount. But, as a matter of bookkeeping, the
premium is entered at the full rate and the abatement (that is, the amount by
which it was reduced) is entered as a credit. The financial result both to the
company and to the policy holders is, however, exactly the same whether the
renewal premium is reduced by a dividend or whether the renewal premium
remains unchanged, but is paid in part either by a credit or by cash received as a
dividend. And the entries in bookkeeping would be substantially the same.
Because the several ways of paying a dividend are, as between the company
and the policy holder, financial equivalents, Congress, doubtless, concluded to

make the incidents the same, also, as respects income taxation. Where the
dividend was used to abate or reduce the full or gross premium, the direction to
eliminate from the apparent premium receipts is aptly expressed by the phrase
'shall not include,' used in clause (c) above. Where the premium was left
unchanged, but was paid in part by a credit or cash derived from the dividend,
the instruction would be more properly expressed by a direction to deduct those
credits. Congress doubtless used the words 'shall not include' as applied also to
these credits because it eliminated them from the aggregate of taxable
premiums as being the equivalent of abatement of premiums.
10

That such was the intention of Congress is confirmed by the history of the
noninclusion clause (c), above. The provision in the Revenue Act of 1913, for
taxing the income of insurance companies is in large part identical i th the
provision for the special excise tax upon them imposed by the Act of August 5,
1909, c. 6, 38, 36 Stat. 112. By the latter act the net income of insurance
companies was also to be ascertained by deducting from gross income 'sums
other than dividends, paid within the year on policy and renewal contracts'; but
there was in that act no noninclusion clause whatsoever. The question arose
whether the provision in the act of 1913 identical with (c) above prevented
using in the computation the reduced renewal premiums instead of the full
premiums, where the reduction in the premium had been effected by means of
dividends. In Mutual Benefit Life Insurance Co. v. Herold, 198 Fed. 199,
decided July 29, 1912, it was held that the renewal premium as reduced by
such dividends should be used in computing the gross premium; and it was said
(page 212) that dividends so applied in reduction of renewal premiums 'should
not be confused with dividends declared in the case of a full-paid participating
policy, wherein the policy holder has no further premium payments to make.
Such payments having been duly met, the policy has become at once a contract
of insurance and of investment. The holder participates in the profits and
income of the invested funds of the company.' On writ of error sued out by the
government the judgment entered in the District Court was affirmed by the
Circuit Court of Appeals on January 27, 1913 (201 Fed. 918, 120 C. C. A. 256),
but that court stated that it refrained from expressing any opinion concerning
dividends on full paid policies, saying that it did so 'not because we wish to
suggest disapproval, but merely because no opinion about these matters is
called for now, as they do not seem to be directly involved.' The noninclusion
clause in the Revenue Act of 1913 (c) above, was doubtless framed to define
what amounts involved in dividends should be 'nonincluded,' or deducted, and
thus to prevent any controversy arising over the questions which had been
raised under the act of 1909.5 The petition for writ of certiorari applied for by
the government was not denied by this court until December 15, 1913 (231 U.
S. 755, 34 Sup. Ct. 323, 58 L. Ed. 468); that is, after the passage of the act.

11

Second. It is argued that the nature of life insurance dividends is the same,
whatever the disposition made of them, and that Congress could not have
intended to relieve the companies from taxation to the extent that dividends are
applied in payment of premiums and to tax them to the extent that dividends are
not so applied. If Congress is to be assumed to have intended, in obedience to
the demands of consistency, that all dividends declared under life insurance
policies should be treated alike in connection with income taxation regardless
of their disposition, the rule of consistency would require deductions more farreaching than those mow claimed by the company. Why allow so-called
noninclusion of amounts equal to the dividends paid in cash but not applied in
reduction of renewal premium and disallow so-called noninclusion of amounts
equal to the dividends paid by a credit representing amounts retained by the
company for accumulation or to be otherwise used for the policy holders'
benefit? The fact is, that Congress has acted with entire consistency in laying
down the rule by which in computing gross earnings certain amounts only are
excluded; but the company has failed to recognize what the principle is which
Congress has consistently applied. The principle applied is that of basing the
taxation on receipts of net premiums, instead of on gross premiums. The
amount equal to the aggregate of certain dividends is excluded, although they
are dividends because by reason of their application the net premium receipts
of the tax year are to that extent less. There is a striking difference between an
aggregate of individual premiums, each reduced by means of dividends, and an
aggregate of full premiums, from which it is sought to deduct amounts paid out
by the company which hv e no relation whatever to premiums received within
the tax year, but which relate to some other premiums which may have been
received many years earlier. The difference between the two cases is such as
may well have seemed to Congress sufficient to justify the application of
different rules of taxation.

12

There is also a further significant difference. All life insurance has in it the
element of protection. That afforded by fraternal beneficiary societies, as
originally devised, had in it only the element of protection. There the premiums
paid by the member were supposed to be sufficient, and only sufficient, to pay
the losses which will fall during the current year, just as premiums in fire,
marine, or casualty insurance are supposed to cover only the losses of the year
or other term for which the insurance is written. Fraternal life insurance has
been exempted from all income taxation; Congress having differentiated these
societies, in this respect as it had in others, from ordinary life insurance
companies. Compare Royal Arcanum Supreme Council v. Behrend, 247 U. S.
394, 38 Sup. Ct. 522, 62 L. Ed. 1182, 1 A. L. R. 966. But in level premium life
insurance, while the motive for taking it may be mainly protection, the business
is largely that of savings investment. The premium is in the nature of a savings

deposit. Except where there are stockholders, the savings bank pays back to the
depositor his deposit with the interest earned less the necessary expense of
management. The insurance company does the same; the difference being
merely that the savings bank undertakes to repay to each individual depositor
the whole of his deposit with interest; while the life insurance company
undertakes to pay to each member of a class the average amount (regarding the
chances of life and death); so that those who do not reach the average age get
more than they have deposited, that is, paid in premiums (including interest)
and those who exceed the average age less than they deposited (including
interest). The dividend of a life insurance company may be regarded as paying
back part of these deposits called premiums. The dividend is made possible
because the amounts paid in as premium have earned more than it was assumed
they would when the policy contract was made, or because the expense of
conducting the business was less than it was then assumed it would be or
because the mortalitythat is, the deathsin the class to which the policy
holder belongs proved to be less than had then been assumed in fixing the
premium rate. When for any or all of these reasons the net cost of the
investment (that is, the right to receive at death or at the endowment date the
agreed sum) has proved to be less than that for which provision was made, the
difference may be regarded either as profit on the investment or as a saving in
the expense of the protection. When the dividend is applied in reduction of the
renewal premium, Congress might well regard the element of protection as
predominant and treat the reduction of the premium paid by means of a
dividend as merely a lessening of the expense of protection. But after the policy
is paid up the element of investment predominates and Congress might
reasonably regard the dividend substantially as profit on the investment.
13

The dividends, aggregating $686,503, which the Penn Mutual Company insists
should have been 'nonincluded,' or more properly deducted, from the gross
income, were, in part, dividends on the ordinary limited payment life policies
which had been paid up. There are others which arose under policy contracts in
which the investment feature is more striking; for instance, the Accelerative
Endowment Policy or such special form of contract as the 25-year '6%
Investment Bond' matured and paid March, 1913, on which the policy holder
received besides dividends, interest, and a 'share of forfeitures.' In the latter, as
in 'Deferred Dividend' and other semi-tontine policies, the dividend represents
in part what clearly could not b regarded as a repayment of excess premium of
the policy holder receiving the dividend. For the 'share of the forfeiture' which
he receives is the share of the redundancy in premium of other policy holders
who did not persist in premium payments to the end of the contract period.

14

Third. The noninclusion clause here in question, (c) above, is found in section

II G(b) in juxtaposition to the provisions concerning mutual fire and mutual

marine companies, clauses (a) and (b) above. The fact that in three separate
clauses three different rules are prescribed by Congress for the treatment of
redundant premiums in the three classes of insurance would seem to be
conclusive evidence that Congress acted with deliberation and intended to
differentiate between them in respect to income taxation. But the company,
ignoring the differences in the provisions concerning fire and marine companies
respectively, insists that mutual life insurance rests upon the same principles as
mutual fire and marine, and that as the clauses concerning fire and marine
companies provide specifically for noninclusion in or deduction from gross
income of all portions of premiums returned, Congress must have intended to
apply the same rule to all. Neither premise nor conclusion is sound.
15

Mutual fire, mutual marine, and mutual life insurance companies are analogous
in that each performs the service called insuring wholly for the benefit of their
policy holders, and not like stock insurance companies in part for the benefit of
persons who as stockholders have provided working capital on which they
expect to receive dividends representing profits from their investment. In other
words, these mutual companies are alike in that they are co-operative
enterprises. But in respect to the service performed fire and marine companies
differ fundamentally, as above pointed out, from legal reserve life companies.
The thing for which a fire or marine insurance premium is paid is protection
which ceases at the end of the term. If after the end of the term a part of the
premium is returned to the policy holder, it is not returned as something
purchased with the premium, but as a part of the premium which was not
required to pay for the protection; that is, the expense was less than estimated.
On the other hand, the service performed in level premium life insurance is
both protection and investment. Premiums paidnot in the tax year, but
perhaps a generation earlierhave earned so much for the cooperators that the
company is able to pay to each not only the agreed amount, but also additional
sums called dividends, and have earned these additional sums, in part at least,
by transactions, not among the members, but with others, as by lending the
money of the co-operators to third persons who pay a larger rate of interest than
it was assumed would be received on investments. The fact that the investment
resulting in accumulation or dividend is made by a cooperative as distinguished
from a capitalistic concern does not prevent the amount thereof being properly
deemed a profit on the investment. Nor does the fact that the profit was earned
by a co-operative concern afford basis for the argument that Congress did not
intend to tax the profit. Congress exempted certain co-operative enterprises
from all income taxation, among others, mutual savings banks; but, with the
exception of fraternal beneficiary societies, it imposed in express terms such
taxation upon 'every insurance company.'6

16

The purpose of Congress to differentiate between mutual fire and marine

insurance companies, on the one hand, and life insurance companies, on the
other, is further manifested by this: The provision concerning return premiums
in computation of the gross income of fire and marine insurance companies is
limited in terms to mutual companies, whereas the noninclusion clause (c),
above, relating to life insurance companies, applies whether the company be a
stock or a mutual one. There is good reason tob elieve that the failure to
differentiate between stock and mutual life insurance companies was not
inadvertent. For while there is a radical difference between stock fire and
marine companies and mutual fire and marine companies, both in respect to the
conduct of the business and in the results to policy holders, the participating
policy commonly issued by the stock life insurance company is, both in rights
conferred and in financial results, substantially the same as the policy issued by
a purely mutual life insurance company. The real difference between the two
classes of life companies as now conducted lies in the legal right of electing
directors and officers. In the stock company stockholders have that right; in the
mutual companies the policy holders who are the members of the corporation.

17

The Penn Mutual Company, seeking to draw support for its argument from
legislation subsequent to the Revenne Act of 1913, points also to the fact that
by the Act of September 8, 1916, c. 463, 12, subsec. second, subd. c. 39 Stat.
756, 768 (Comp. St. 6336l), the rule for computing gross income there
provided for mutual fire insurance companies was made applicable to mutual
employers' liability, mutual workmen's compensation, and mutual casualty
insurance companies. It asserts that thereby Congress has manifested a settled
policy to treat the taxable income of mutual concerns as not including premium
refunds, and that, if mutual life insurance companies are not permitted to
'exclude' them, these companies will be the only mutual concerns which are
thus discriminated against. Casualty insurance, in its various forms, like fire and
marine insurance, provide only protection, and the premium is wholly an
expense. If such later legislation could be considered in construing the act of
1913, the conclusion to be drawn from it would be clearly the opposite of that
urged. The later act would tend to show that Congress persists in its
determination to differentiate between life and other forms of insurance.

18

Fourth. It is urged that in order to sustain the interpretation given to the

noninclusion clause by the Circuit Court of Appeals (which was, in effect, the
interpretation set forth above) it is necessary to interpolate in the clause the
words 'within such year,' as shown in italics in brackets, thus:

19

'And life insurance companies shall not include as income in any year such
portion of any actual premiums received from any individual policy holder

[within such year] as shall have been paid back or credited to such individual
policy holder, or treated as an abatement of premium of such individual policy
holder, within such year.'
20

What has been said above shows that no such interpolation is necessary to
sustain the construction given by the Circuit Court of Appeals. That court did
not hold that the permitted noninclusion from the year's gross income is limited
to that portion of the premium received within the year which, by reason of a
dividend, is paid back within the same year. What the court held was that the
noninclusion is limited to that portion of the premium which, although entered
on the books as received, was not actually received within the year, because the
full premium was, by means of the dividend, either reduced or otherwise wiped
out to that extent. Nor does the government contend that any portion of a
premium not received within the tax year shall be included in computing the
year's gross income. On the other hand, what the company is seeking is not to
have 'nonincluded' a part of the premiums which were actually received within
the year, or which appear as matter of bookkeeping to have been received, but
actually were not. It is seeking to have the aggregate of premiums actually
received within the year reduced by an amount which the company paid out
within the year, and which it paid out mainly on account of premiums received
long before the tax year. What it seeks is not a noninclusion of amounts paid in,
but a deduction of amount paid out.

21

If the terms of the noninclusion clause (c), above, standing alone, permitted of
an doubt as to its proper construction, the doubt would disappear when it is read
in connection with the deduction clause (d), above. The deduction there
prescribed is of 'the sums other than dividends paid within the year on policy
and annuity contracts.' This is tantamount to a direction that dividends shall not
be deducted. It was argued that the dividends there referred to are 'commercial'
dividends like those upon capital stock, and that those here involved are
dividends of a different character. But the dividends which the deduction clause
says, in effect, shall not be deducted, are the very dividends here in question;
that is, dividends 'on policy and annuity contracts.' None such may be deducted
by any insurance company except as expressly provided for in the act, in
clauses quoted above (a), (b), and (c); that is, clauses (a), (b), and (c) are, in
effect, exceptions to the general exclusion of dividends from the permissible
deductions as prescribed in clause (d) above.

22

In support of the company's contention that the interpolation of the words

'within the year' is necessary in order to support the construction given to the
act by the Circuit Court of Appeals we are asked to consider the legislative
history of the Revenue Act of 1918 (enacted February 24, 1919, [40 Stat. 1057,

c. 18]), and specifically to the fact that in the bill as introduced in and passed by
the House the corresponding section233 (a); Comp. St. Ann. Supp. 1919,
6336 1/8 p contained the words 'within the taxable year,' and that these words
were stricken out by the Conference Committee (Report No. 1037, Sixty-Fifth
Congress, Third Session). The legislative history of an act may, where the
meaning of the words used is doubt ful, be resorted to as an aid to construction.
Caminetti v. United States, 242 U. S. 470, 490, 37 Sup. Ct. 192, 61 L. Ed. 442,
L. R. A. 1917F, 502, Ann. Cas. 1917B, 1168. But no aid could possibly be
derived from the legislative history of another act passed nearly six years after
the one in question. Further answer to the argument based on the legislative
history of the later act would, therefore, be inappropriate.
23

We find no error in the judgment of the Circuit Court of Appeals.

24

It is affirmed.

The manner in which mutual level premium life insurance companies conduct
their business, and the nature and application of dividends are fully set forth in
Mutual Benefit Life Ins. Co. v. Herold (D. C.) 198 Fed. 199; Connecticut
General Life Ins. Co. v. Eaton (D. C.) 218 Fed. 188; Connecticut Mutual Life
Ins. Co. v. Eaton (D. C.) 218 Fed. 206.

The percentage of the redundancy to the premium varies, from year to year,
greatly, in the several fields of insurance, and likewise in the same year in the
several companies in the same field. Where the margin between the probable
losses and those reasonably possible is very large, the return premiums rise
often to 90 per cent. or more of the premium paid. This is true of the
manufacturers' mutual fire insurance companies of New England. See Report
Massachusetts Insurance Commissioner (1913) vol. I, p. 16.

A separate account is kept by the company with each policy holder. In that
account there is entered each year the charges of the premiums payable and all
credits either for cash payments or by way of credit of dividends, or by way of
abatement of premium.

The dividend provision of the Mutual Benefit Life Insurance Company

involved in the Herold Case, supra, 198 Fed. 199, 204, was, in part: 'After this
policy shall have been in force one year, each year's premium subsequently
paid shall be subject to reduction by such dividend as may be apportioned by
the directors.' The dividend provision in some of the participating policies
involved in the Connecticut General Life Ins. Co. Case, supra, 218 Fed. 188,

192, was: 'Reduction of premiums as determined by the company will be made

annually beginning at the second year, or the insured may pay te full premium
and instruct the company to apply the amount of reduction apportioned to him
in any one of the following plans: [Then follow four plans.]'
5

Substantially the same questions were involved, also, in Connecticut General

Life Ins. Co. v. Eaton (D. C.) 218 Fed. 188, and Connecticut Mutual Life Ins.
Co. v. Eaton (D. C.) 218 Fed. 206, in which decisions were not, however,
reached until the following year.

The alleged unwisdom and injustice of taxing mutual life insurance companies
while mutual savings banks were exempted had been strongly pressed upon
Congress. Briefs and statements filed with Senate Committee on Finance on H.
R. 3321Sixty-Third Congress, First Session, vol. 3, pp. 1955-2094.