Commissioner of Internal Revenue v. Insular Life Assurance Co. Ltd.

SIXTEENTH DIVISION [CA-G.R. SP No. 46516. September 29, 1998.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . THE INSULAR LIFE ASSURANCE COMPANY, LTD. , respondent . D E C I S I O N ALIO-HORMACHUELOS ,, J p : This is a petition for review of the decision of the Court of Tax Appeals (Rollo, p. 19) dated December 29, 1997 in C.T.A. Case No. 5336, entitled "The Insular Life Assurance Co., Ltd. vs. Commissioner of Internal Revenue", exempting respondent-petitioner from payment of premium and documentary stamp taxes. prcd The antecedent facts as stated in the petition are as follows: "On February 14, 1998, respondent applied with petitioner for exemption from payment of premium tax and documentary stamp tax, citing Section 121 and 199 of the National Internal Revenue Code claiming that, as a mutual life insurance company, it is a cooperative company and, therefore, exempt from payment of said taxes. "On February 15, 1995, respondent wrote petitioner a follow-up letter on the matter. "In response, petitioner issued a Letter of Authority, dated June 9, 1995, authorizing its revenue officers who are with the Tax Fraud Division of examine respondent's books of accounts and other financial records for any liability on income, value-added, withholding and documentary stamp taxes for the year 1994. "On August 10, 1995, a notice of proposed tax deficiency assessments, which have been limited to documentary stamp and premium taxes, together with a request for an informal conference with the respondent was issued. "Forthwith on August 30, 1995, respondent filed its letter of protest of even date against such proposed tax deficiency assessments contending that the issuance of the latter was irregular and premature in view of the pendency of its request for exemption from premium and documentary stamp taxes. "On January 5, 1996, petitioner received from the respondent several assessment notices, all dated September 29, 1995, issued against it for deficiency documentary stamp and premium taxes and penalty for late payment of premium tax totaling to P360,368,663.37 for the years 1990 to 1994. "On January 19, 1996, respondent requested for a reconsideration of the aforementioned assessments. cdll "On March 15, 1996, respondent received a copy of the letter of petitioner, dated February 22, 1996, denying its request for reconsideration. "Thus, herein respondent filed a petition for review with the Court of Tax Appeals. On December 29, 1997, the Court of Tax Appeals rendered the questioned decision finding that respondent is exempt from payment of premium and documentary stamp taxes." (Rollo, pp. 10-12) Petitioner now comes to Us raising the following issues: "1. THE COURT OF TAX APPEALS ERRED IN ITS FINDINGS THAT A MUTUAL LIFE INSURANCE COMPANY IS A COOPERATIVE COMPANY EXEMPT FROM PREMIUM AND DOCUMENTARY STAMP TAXES. "2. THE COURT OF TAX APPEALS ERRED IN RULING THAT DESPITE DIVIDENDS DECLARED BY RESPONDENT IT IS OPERATED NOT FOR PROFIT AND THEREBY EXEMPT FROM PREMIUM AND DOCUMENTARY STAMP TAXES." (Rollo, p. 12) The issues boil down to whether or not a mutual life insurance company falls within the coverage of the term "Cooperative Company", thus exempt from payment of premium and documentary stamp taxes as provided in Section 121 (now Section 123, RA 8424) and Section 199(1) (now Section 199(a), RA 8424), respectively of the Tax Code. We rule in the affirmative. Petitioner contends that respondent company is not a "purely" cooperative company; that it allegedly operates for profit and its realized income is distributed to member policyholders in the form of "dividends." Respondent claims that as a purely cooperative company, it is not organized for profit, and that the "dividends" it distributes are mere returns of excess premiums of the policyholders. Section 123 of R.A. 8424, otherwise known as the Tax Reform Act of 1997 defines "cooperative company" in this wise: "Sec. 123. . . . Cooperative companies or associations are such as are conducted by the members thereof with the money collected from among themselves and solely for their own protection and not for profit." As deduced from the aforequoted provision, the following are the characteristics of a cooperative association: 1) it is managed by members; 2) it is operated with money collected from members; 3) it has for its main purpose the mutual protection of members and not profit. Respondent as a mutual life insurance company satisfies all the aforementioned elements as has been thoroughly threshed out in the decision of the Court of Tax Appeals. However, for emphasis, a review of the American jurisprudence serving as precedents is hereby provided: In relation to the first characteristic which is that the policy holder is a member of the insurance company, who takes part in its management, the following cases are in support thereof: "Ownership of mutual company is in its policyholders, who are its members." (Pink v. Town Taxi Co., 21 A. 2d 656, 138 Me. 44) (44 C.J.S. p. 644) "Each member of a mutual insurance company is at the same time insurer and insured." ( ibid ) "It is an enterprise the distinguishing feature of which is the mutuality of cooperation of the members who are united for that purpose, and each of whom takes a proportionate part in the management of its affairs, being at once insurer and insured, and participants alike in its profits and losses, and all of whom are policy holders (Ohio Farmers Indemnity Co. v. Commissioner of Internal Revenue, C.C.A., 108 F. 2d 665) (44 C.J.S., p. 644) "Membership in a mutual insurance company usually carries with it a voice in the management." (Schmidt v. German Mut. Ins. Co., 30 N.E. 939, 4 Ind. App. 340) (44 C.J.S. p. 657) As to the second characteristic, that a mutual life insurance company is operated with money collected from its members: "A mutual insurance company may be defined as a cooperative enterprise, wherein the members constitute both insurer and insured, and contribute, by a system of premiums or assessments, to the creation of a fund from which all losses and liabilities are paid, and wherein the profits are divided among the members in proportion to their interests. (Keehn v. Hodge Drive-It-Yourself, App. 53 N.E. 2d 69) (44 C.J.S. p. 644) "A mutual insurance company is one whose fund for the payment of losses and expenses consists of premiums or assessments mutually contributed by the parties insured, and not of capital subscribed or furnished by outside parties." (Petition of Charlton Bros. Trans. Co., 30 A. 2d 538, 181 Md. 253). With regard to the third characteristic that a mutual life insurance company has for its main purpose the mutual protection of members and not for profit. "The essential of "mutuality" is membership. Incident to membership is the right to redundancy and the burden of assessment." (Driscoll v. Washington Country Fire Ins. Co., Washington, C.C.A. Pa., 110 F. 2d 485, 490) (44 C.J.S. p. 644). "It is an enterprise the distinguishing feature of which is the mutuality of cooperation of the members who are united for that purpose. . . ." (Ohio Farmers Indemnity Co. v. Commissioner of Internal Revenue, supra ) We find no cogent reason to dispute the factual findings of the respondent court that private respondent Insular Life Assurance Company, Ltd. has satisfactorily demonstrated that it is a cooperative association as defined in its Amended Articles of Incorporation and By-laws (Rollo, pp. 36-38). Findings of fact of the Court of Tax Appeals are entitled to the highest respect and can only be disturbed on appeal if they are not supported by substantial evidence or if there is a showing of gross error or abuse in the part of the tax court (Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation, 181 SCRA 214). prLL The dividends distributed to respondent's policy holders are not synonymous with corporate profits. The following jurisprudence are persuasive: "The theory of a dividend in a mutual company differs considerably from the one in connection with the ordinary corporate dividend (Lipsman v. Reich, 16 N.Y.S. 2d 892, 173 Misc. 294, 44 C.J.S. 671) "Such dividends are not dividends, in the accepted and ordinary sense of the word but represent an excess premium or surcharge paid by the policy holder, and then returned to him, without interest, less the costs attendant on collection and administration and various other deductions. (Wells v. Metropolitan Life Ins. Co., 13 N.Y.S. 2d 22) (44 C.J.S. 671) "Such dividends are strictly speaking, not profits as in the case of an ordinary corporation, but really constitute a return to the policy holder of the amount he has been overcharged for his insurance. (Rhine v. New York Life Ins. Co., 289 N.Y.S. 117, 248) (44 C.J.S. 674) The dividends are not in any real sense dividends, profits, or receipts but overpayments by the policy holders who are entitled to their return. Thus it has been held: "The question for our consideration is one of first impression in this jurisdiction. There are, however, precedents in the United States that can very well be applied in this jurisdiction. Under the so-called 'level premium plan', the amount of premium paid by a policy holder during the earlier years are in excess of the current cost of his insurance. Such excess, in life insurance company, constitutes its margin of safety and must be sufficiently large to secure the company's ability to pay its claim as they accrue beyond peradventure. The policy is issued at a fixed premium. That stipulated premium cannot be increased, but may be lessened annually by so much as the experience of the preceding year has determined it to have been greater than the cost of carrying the insurance, and the difference between the amount of the stipulated premium and the cost of carrying the risk constitutes the so-called dividend. The stipulated premium in participating policy is invariably greater than the fixed premium in non-participating policy issued at the same age and upon the same term. This is the kind of dividend which petitioner paid to its participating policy holders. This dividend , however , is not in any real sense a dividend . It separates merely to abate or reduce the stipulated premium to the extent that is has been determined by experience that the policy holder paid for his insurance during the preceding year more than it actually cost petitioner to carry the risk . This excess payment represents , not profits or receipts , but overpayment . It is an overpayment because being entitled to his insurance at cost and having paid by way of premiums more than its cost , he is equitably entitled to have such excess applied for his benefit . (Philippine American Life Insurance Co. vs. CIR, G.R. No. L-38292, March 8, 1974)." (Rollo, p. 43-44, Emphasis Supplied) WHEREFORE, finding no reversible error in the assailed decision, the same is hereby AFFIRMED in toto. SO ORDERED. Guerrero and Villarama , Jr ., JJ ., concur.