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District Court of Appeal, First District, Division 2, California.


Civ. 12653.

Decided: October 10, 1944

Robert W. Kenny, Atty. Gen., and T. A. Westphal, Jr., Deputy Atty. Gen., for appellants. Burbank & Laumeister and Daniel W. Burbank, all of San Francisco, for respondent.

The case is one to recover taxes paid under protest. It was tried on a written stipulation of facts. The plaintiff had judgment and the defendants' appeal presents the single question of the proper interpretation of the statute under which the disputed tax was denied.

From the stipulation of facts it appears that the plaintiff is an interinsurance exchange engaged in the business of workmen's compensation insurance. Acting under statutory permission the subscribers in the exchange executed powers of attorney appointing Industrial Underwriters, Inc., a corporation, as attorney in fact for each subscriber to exchange contracts of insurance among subscribers. In this manner each subscriber agreed to deposit a sum computed under the terms of his policy and each subscriber was to have returned to him annually the savings accruing from the operations. The attorney in fact was to receive as compensation for services rendered under the contract “after first deducting the cost of any reinsurance * * * seventeen and one–half per cent of all compensation premium deposits received and in addition the attorney is to receive a sum equal to five per cent of the subscriber's savings.”

In the calendar year 1936 the exchange received from the subscribers compensation premium deposits in the sum of $1,604,514.45. Savings for the year aggregating $197,702.04 were “credited to the subscribers' accounts as savings,” and the State Board of Equalization assessed a tax upon the difference between these sums in the amount of $36,577.13, computed at the rate of 2.6%. This tax was paid. By appropriate resolution the exchange declared these savings to be returnable to its subscribers “as a refund of returnable surplus” and thereupon credited to each subscriber the apportioned amounts on the books of the exchange. Ninety–five per cent of the sum so credited was paid to each subscriber and five per cent was paid to the attorney in fact in accord with the aforesaid agreement. In 1940 the State Board of Equalization levied an additional assessment upon the 1936 premiums to cover the sum thus paid to the attorney in fact. This tax was paid under protest and is the subject of this controversy. The plaintiff had judgment from which this appeal is taken.

The question presented for decision involves the interpretation of section 1530 of the Insurance Code, St.1935, p. 573, which reads in part: * * * each exchange shall pay * * * an annual tax upon all sums paid in the preceding calendar year by subscribers in this State by reason of the insurance exchanged, * * * after deducting therefrom premium deposit returns or cancellations, consideration for reinsurance and all amounts returned to subscribers and/or credited to their accounts as savings * * *.” The authority of an exchange to return savings and to allow credits is found in section 1420 of the Code. The validity of the structure of reciprocal or interinsurance exchanges as authorized by the Insurance Code was approved in Mitchell v. Pacific Greyhound Lines, 33 Cal.App.2d 53, 91 P.2d 176.

It is the contention of appellants that the five per cent of the subscriber's savings is not paid to the attorney in fact by the subscriber but that, under the terms of the agreement, the attorney in fact is entitled to be paid by the subscriber “a sum equal to 5% of the subscriber's savings.” From this it is argued that the sum payable to the attorney in fact is not a percentage of “true savings” but is merely an item of expense in the operation of the business of the exchange. But the statute provides that the tax shall be based on the sum remaining after deducting premium deposits returned to subscribers “or” credited to their accounts as savings. It is not disputed that the full sum $197,702.04 was “credited” to the subscribers as savings and that is as much as the statute requires to take that sum out of the taxable total of premium deposits. The State is not concerned with what the individual subscriber does with the portion of the savings paid or credited to him. By the terms of the statute whenever “savings” are returned to the subscriber, or money is credited to his account as savings, the amount so paid or credited is to be deducted from the sum taxable. Here the stipulation of facts recites that “plaintiff exchange did credit said apportioned amounts as savings to subscribers' accounts on the books of plaintiff exchange; that the aggregate of such sums credited was $197,702.04; that thereafter plaintiff paid by check to subscribers, 95% of the sum credited to each subscriber and paid to said attorney in fact 5% thereof.” Now if it is a fact that 100% of the full sum was “credited to their accounts as savings” the subscribers were entitled to have that full sum deducted from the sum of the premium deposits paid in by them in the preceding calendar year in order that the sum or base on which the tax should be rated may be determined in accordance with the plan of the statute. Since the parties agree that the full sum was credited as savings on the books of the exchange, there is no room for argument that subsequent disposal of those amounts so credited should return them to a taxable status. Thus some subscriber might direct that their credits be retained for payment of future premiums, or that they may be contributed to charity. They are credits of the individual subscriber as soon as they are entered as such on the books of the exchange. The agreement between the subscribers and their attorney in fact that the exchange shall pay the latter five per cent of such savings does not restore that amount to the taxable funds of the exchange, and it is the funds of the exchange only which is made taxable under the provisions of section 1530 of the Insurance Code.

As we view the statute it is not ambiguous nor uncertain. Hence there is no call for judicial construction or interpretation. The expression “credited to their accounts as savings” is plain and unmistakable language in common use and must be read in that light. Our conclusions therefore are that since the full sum was credited on the books of the exchange to the accounts of the individual subscribers as savings the full sum should have been deducted from the premium deposits to determine the sum on which the tax should be based.

The judgment is affirmed.

NOURSE, Presiding Justice.

SPENCE, J., and GOODELL, Justice pro tem., concur.