CALIFORNIA STATE AUTOMOBILE ASSOCIATION INTER INSURANCE BUREAU v. STATE BOARD OF EQUALIZATION (1974)

The California State Automobile Association Inter-Insurance Bureau (hereinafter ‘the Bureau’) claimed deductions in its 1964 California gross premium tax return for amounts credited as savings to the accounts of their subscribers (policyholders) whose insurance policies did not expire until 1965. In previous years the Bureau had claimed such deduction for he year in which the policy expired. The State Board of Equalization (hereinafter the ‘Board’) disallowed the deductions in the 1964 tax return attributable to policies expiring in 1965 but allowed them as deductions in the tax return for the year 1965. The Bureau paid the deficiency assessment resulting from said disallowance under protest and then filed the instant action to recover the amount thereof with interest. Upon the trial judgment was entered that the Bureau take nothing. The Bureau appeals from said judgment.

The Bureau is a reciprocal interinsurance exchange organized under and existing by virtue of the laws of the State of California. Its business is conducted pursuant to the provisions of division 1, part 2, chapter 3 (§§ 1280 to 1540, inclusive) of the Insurance Code relating to reciprocal insurers. During the period here involved subdivision (f) of section 6 of the Bureau's rules and regulations provided for a reserve fund maintained by debiting each subscriber (policyholder) a sum based on a percentage of his annual premium deposit which fund could be applied to losses and/or expenses and, when expedient and justified by the Bureau's financial condition, to the payment of savings to subscribers upon expiration of their policies pursuant to a uniform percentage of their annual premium deposits.¹

A 15 percent dividend was declared for the Bureau's Group A subscribers on October 2, 1964, whose policies expired in January 1965; on November 6, 1964, for such subscribers whose policies expired in February 1965; and on December 4, 1964, for such subscribers whose policies expired in March 1965. All such dividends were paid or credited from the reserve fund.

The dividends are declared by the executive committee of the Bureau 90 days in advance of the policy expiration dates. The purpose of declaring a dividend three months before the expiration of a policy is to allow the computer sufficient time to compute the individual dividends and to disseminate the information to all of the Bureau's district offices. The dividends, when declared, are immediately set up as a liability on the books of the Bureau and are credited to the individual subscriber's account in the same month in which the dividend is declared.

The sales representatives are advised of the dividends credited to the subscribers and when they solicit renewals the subscriber is advised of the dividend and that it can be credited to the premium for the ensuing year in which case the premium on renewal is reduced by the amount of the dividend. The subscriber is not advised of the dividend until he receives the renewal memorandum but he will be advised orally of the amount of the dividend credited to his account upon inquiry. A subscriber gets the dividend credit on the renewal of his policy and if he does not renew a check for the dividend is mailed to him. If a policy is cancelled before the expiration date and after the declaration of a dividend the subscriber receives either a return of the premium or the dividend, whichever is greater.

No dividend, once declared, has ever been reduced. On one occasion the dividend was increased from 15 percent to 20 percent. There was testimony that once declared the dividend is irrevocable because it is a liability and a commitment has been made. Testimony was also adduced that if a subscriber requested the dividend prior to the renewal or expiration of the policy he would be given a check for it.

Prior to 1964 the Bureau claimed a dividend savings deduction for policies expiring in the tax year. In 1964 the Bureau claimed these deductions for policies expiring in 1964 and for policies expiring in the first three months of 1965. The Board disallowed the claimed deductions for policies expiring in 1965 notwithstanding that the dividend savings were declared in 1964.

Section 14 4/5 of article XIII of the California Constitution imposes a gross premiums tax on insurers. Gross premiums of reciprocal or interinsurance exchanges are determined as provided in section 1530 of the Insurance Code.² (Rev. & Tax. Code, § 12221.) Section 1530, in pertinent part, provides: ‘. . . For the purposes of Section 12221 of the Revenue and Taxation Code, the term gross premiums, as applied to reciprocal or interinsurance exchanges, includes all sums paid by subscribers in this State by reason of the insurance exchange, . . . after deducting therefrom premium deposit returns or cancellations, and all amounts returned to subscribers or credited to their accounts as savings, . . .’ (Emphasis added.)

The Bureau contends that the phrase ‘credited to their accounts as savings' means the point in time when the Bureau credits a saving to a subscriber on its books. The Board, in turn, asserts that the phrase has reference to the election by a subscriber to apply his savings dividends to the amount due for his renewal premium. The Board contends, further, that the word ‘credited’ is alternative to and coequal with the word ‘returned.’

A plain reading of the language in question clearly indicates that the word 'credit' is not synonymous with ‘returned’ and that it has reference to ‘credit’ in its usual connotation, i. e., as an item entered on the credit side of an account as opposed to a debit entry and that it has no reference to the time a sum of money is actually paid. In Industrial Indemnity Exchange v. State Board of Equalization, 26 Cal.2d 772, 776, 161 P.2d 222, 225, we find the following pertinent observation: ‘The word ‘credited’ as differentiated from ‘returned’ must cover a situation where there was a lack of actual payment. To be ‘credited’ it must have been so set aside for the subscribers that there would be no further claims against it for the current expenses including the compensation of the attorney.'

In Industrial Indemnity Exchange, it was held that there was no ‘savings' and therefore no ‘credit’ to the subscribers within the purview of section 1530 when the compensation of one acting as attorney-in-fact for the subscribers yet remained to be deducted as an item of expense. (26 Cal.2d at p. 776, 161 P.2d 222.) ‘They [the subscribers] have no savings credited in reality until all of such items [current expenses and compensation of the attorney] have been deducted. The gross sum paid by the subscribers less the savings is not truly reflected until the savings are fairly ascertained.’ (Ind. Indem. Exch. v. State Bd. of Equalization, supra, 26 Cal.2d at p. 776, 161 P.2d at p. 225.)

The principles articulated in industrial Indemnity Exchange are applicable to the present case although the facts of that case are distinguishable. In the instant case the savings to the subscribers in the form of the dividends declared have been ascertained. They have been set aside for the subscribers in a manner that there are no further claims against them for current expenses or other existing and binding obligations. These dividends vested in and belonged to the subscribers when credited to their accounts. There only remained the actual payment of these dividend savings and this payment was deferred until the expiration of the subscriber's insurance policy. Accordingly, under the plain language of section 1530 these dividends are ‘saving’ properly credited to the subscribers' accounts and are deductible from gross premiums for the year 1964, the year during which they were credited.

The provisions of sections 750, 763 or 1490 do not compel a different conclusion. Section 750 provides that any rebate of the premiums offered or paid as an inducement to insurance is an unlawful rebate. Subdivision (a) of section 763 provides, however, that it is not an unlawful rebate for an insurer issuing policies on a participating plan to return any portion of the premium as a dividend after the expiration of the term covered by such policy. (See Contractor's etc. Assn. v. Cal. Comp. Ins. Co., 48 Cal.2d 71, 74, 307 P.2d 626.)³ In the instant case the savings dividends, although declared by the Bureau and credited to the account of the subscriber prior to the expiration of the policy, were not actually payable to him until after its expiration. Section 1530 contemplates that dividends credited to subscribers' accounts are deductible from gross premiums in the year in which they are so credited and they do not constitute a rebate by virtue of being so credited so long as they are not paid to the subscriber until after the expiration of the policy.

Section 1490, in pertinent part, provides: ‘It is unlawful for any reciprocal or interinsurance exchange, . . . directly or indirectly, to give or offer to a subscriber, an allowance, gift, setoff or payment as an inducement to secure an exchange of indemnities, except in the case of savings or credits to be returned to a subscriber in accordance with the power of attorney or reciprocal or interinsurance contract of the subscriber.’ (Emphasis added.) Here again it is contemplated that savings or credits made by a reciprocal insurer in accordance with the power of attorney or the reciprocal or interinsurance contract shall not be deemed to be a rebate or an inducement to secure an exchange of indemnities. In the instant case the Bureau's subscribers have signed a power of attorney providing that such power ‘shall be exercised strictly in conformity with and subject to the rules and regulations of the Insurance Board of said Bureau, . . .’ Subdivision (f) of the Bureau's rule and regulations, already alluded to, specifically provides that the payment of the savings dividends shall be paid to subscribers upon expiration of their policies. Both the power of attorney executed by the subscriber and the rules and regulations of the Bureau are in compliance with sections 750, 763 and 1490.

It is undisputed that the Bureau paid a deficiency assessment of $36,497.57 plus $1,094.93 for interest thereon, or a total sum of $37,592.50, by virtue of the disallowance of the subject deductions.

The judgment is reversed with directions to the trial court to amend its findings of fact and conclusions of law in conformity with the views herein expressed and to thereupon enter a judgment for the Bureau against the Board for $37,592.50, together with the legal interest that has accrued on said sum.

I respectfully dissent.

The result of the majority opinion is to give the taxpayer a deduction of savings computed over a 15-month period against premiums received in a 12-month period. Such a construction of the statutes conflicts with the general principle expressed in Great Western Financial Corp. v. Franchise Tax Bd. (1971), 4 Cal.3d 1, 92 Cal.Rptr. 489, 479 P.2d 993, as follows: ‘Section 24425 deals with deduction of expenses. Deductions may be allowed or withheld by the Legislature as it sees fit [citations] and such deductions, like credits and exemptions, are to be narrowly construed against the taxpayer [citations].’ (4 Cal.3d at p. 5, 92 Cal.Rptr. at p. 491, 479 P.2d at p. 995.) Furthermore, as pointed out below, the construction given the taxing statutes by the majority opinion raises a grave question of a conflict with the constitutional provisions imposing the tax. This conflict may be avoided by a construction in line with that suggested by the taxing authorities.

I agree with the majority that the word ‘credited’ as used in section 1530 must be given the meaning attributed to it in Ind. Indem. Exch. v. State Bd. Equalization (1945), 26 Cal.2d 772, 161 P.2d 222, where the court observed ‘The word ‘credited’ as differentiated from ‘returned’ must cover a situation where there was a lock of actual payment. To be ‘credited’ it must have been so set aside for the subscribers that there would be no further claims against it for the current expenses including the compensation of the attorney. To say to the subscribers in one breath you have a savings credit of a certain amount, and in the next, but we are taking 5 percent away to meet other existing and binding obligations, is sham and pretence. They have no savings credited in reality until all of such items have been deducted. The gross sum paid by the subscribers less the savings is not truly reflected until the savings are fairly ascertained.' (26 Cal.2d at p. 776, 161 P.2d at p. 225.) The majority opinion does not include the last three sentences of the foregoing quotation, nor does it include the following observation of that court, ‘Realistically viewed, the exchange does not have savings. There may be strings attached to the payment of the surplus to the subscribers in case of insolvency or in other situations.’ (Id., p. 777, 161 P.2d at p. 225.)

The trial court found in part:

‘3. Until the expiration of these policies, the amounts declared as savings dividends for these policies could have been utilized for other purposes by plaintiff.

‘4. The subscribers holding these policies did not have a vested right in any amounts declared as savings dividends until the expiration of the policies involved.

‘5. The savings dividends for some of these policies did cease to exist prior to expiration of the policies, and the declared amounts were returned to a reserve fund where they were subject to payment for losses and expenses.’

It concluded:

‘1. A savings dividend declared by a California reciprocal insurer cannot be ‘credited’ to a subscriber's account as savings under section 1530 of the California Insurance Code until the expiration of that subscriber's policy.

‘2. A California reciprocal insurer cannot properly claim a savings dividend deduction under section 1530 of the California Insurance Code until the expiration of the policies involved.’

These findings and conclusions are sustained by the facts and the law. The taxpayer and the majority have used the word ‘credited’ in the sense of an amount due to the subscriber, when by the content in which it is used it is nothing more than a ‘computation’ placed in a computer for actual credit against a new premium, or return to the subscriber 90 days later at the end of the policy year, provided the policy is kept in effect, and provided that the subscriber's premium deposit for the ongoing year is not called upon for the payment of some unforeseen catastrophic loss.¹ The taxpayer's rules and regulations create no rights to savings in its subscribers until the ‘expiration of their policies.’ (See subdivision (f) of section (6) as set forth in footnote 1 of majority opinion.) The testimony of the president of the taxpayer indirectly acknowledged, as is provided in the foregoing rule, that the savings ‘credited’ by way of computation of an anticipated dividend were legally, even if not so far as could be factually predicted, subject to the payment of losses and expenses. He was asked, ‘And can you conceive of anything that could happen that the dividend once declared, could be reduced?’ He replied, ‘I cannot, keeping in mind that the dividend is declared on the expiring year, or policies, and therefore the results are pretty well in. And I just cannot conceive of a circumstance which would cause us to reduce a dividend which had been declared set up as liability and credited to policies.’ The question is not whether the circumstances can be conceived, but whether there is a right to give the subscriber an irrevocable credit.

Insurance Code section 1420 provides: ‘Savings or credits may be returned to the subscribers irrespective of the source from which such savings or credits accrue whenever such returns do not constitute an impairment of the assets or reserves required to be maintained.’ That section must be read with section 1490 which reads: ‘It is unlawful for any reciprocal or interinsurance exchange, its attorney, agent or broker, directly or indirectly, to give or offer to a subscriber, an allowance, gift, setoff or payment as an inducement to secure an exchange of indemnities, except in the case of savings or credits to be returned to a subscriber in accordance with the power of attorney or reciprocal or interinsurance contract of the subscriber.’ As noted above the contract with the subscriber prohibits any rebates by way of savings until the expiration of the policy year. This provision is in line with the provisions of section 750 which prohibit rebates, and section 763 which provides in pertinent part, ‘The following acts are not unlawful rebates: (a) The return by an insurer issuing policies on a participating plan, or [of] any portion of the premium as a dividend after the expiration of the term covered by such policy. . . .’ (See Contractors etc. Assn. v. Cal. Comp.Ins. Co. (1957) 48 Cal.2d 71, 74, 307 P.2d 626.)

In short, since the computed dividend cannot be paid or be otherwise irrevocably set aside for the use of the subscriber until the expiration of the policy period, the taxpayer by referring to its computation, for purposes entirely proper, as a dividend or ‘credit’ cannot secure a deduction under section 1530 for the year in which it is computed. As stated in Groves v. City of Los Angeles (1953), 40 Cal.2d 751, 256 P.2d 309, where it was contended that a portion of the sum received by a bail bond broker was his fee for expenses and not a part of the premium: ‘The essence of the matter is that the amount paid by the insured for the bond is the premium and it has been so recognized by the courts. [Citations.] And a mere bookkeeping method cannot thwart the law. (Industrial Indem. Exch. v. State Board of Equalization, supra, 26 Cal.2d 772, 161 P.2d 222.)’ (40 Cal.2d at p. 760, 256 P.2d at p. 315.)

The tax involved is imposed by section 14 4/5 of article XIII of the California Constitution. Subdivision (a) expressly makes the provision applicable to reciprocal or interinsurance exchanges of the taxpayer's type. Subdivision (b) reads, ‘An annual tax is hereby imposed on each insurer doing business in this State on the base, at the rates, and subject to the deductions from the tax hereinafter specified.’ Subdivision (c) provides in pertinent part, ‘In the case of an insurer not transacting title insurance in this State, the ‘basis of the annual tax’ is, in respect to each year, the amount of gross premiums, less return premiums, received in such year by such insurer upon its business done in this State, other than premiums received for reinsurance and for ocean marine insurance. . . .' Subdivision (j) reads, ‘This section is not intended to and does not change the law as it has previously existed with respect to the meaning of the words ‘gross premiums, less return premiums, received’ as used in this section or as used in Section 14 or 14 3/4 of this article.' In Equitable Life etc. Soc. v. Johnson (1942), 53 Cal.App.2d 49, 127 P.2d 95, the court observed: ‘. . . it seems . . . clear that it was the intent of the constitutional provision to tax all receipts that could reasonably be classified as ‘premiums.” (53 Cal.App.2d at p. 58, 127 P.2d at p. 99. See also Groves v. City of Los Angeles, supra, 40 Cal.2d 751, 760, 256 P.2d 309; Industrial Ind. Exch. v. State Bd. of Equalization, supra, 26 Cal.2d 772, 161 P.2d 222; Northwestern M. L. Ins. Co. v. Roberts (1918) 177 Cal. 540, 542, 171 P. 313; Allstate Ins. Co. v. State Board of Equalization (1959) 169 Cal.App.2d 165, 168, 336 P.2d 961; Cal. State Auto etc. Bureau v. Downey (1950) 96 Cal.App.2d 876, 880, 216 P.2d 882; and 42 Ops.Cal.Atty.Gen. 252 (1969) Op. No. 69–161.)

In Northwestern M. L. Ins. Co. v. Roberts, supra, the court construed the term ‘return premiums' as used in a similar earlier constitutional provision. It concluded, ‘Its meaning and application as thus interpreted must be confined to that portion of the premium of all insurance companies or associations affected by the amendment which has, for the reasons above referred to, been unearned, and to the return of which the insured has a right enforceable at law. It is clear that as to such portions of the gross premiums of insurance companies or associations as they are, for the reasons stated, not lawfully entitled to retain, no tax should be levied, and that it is to such portions of their premiums as they are thus lawfully bound to return that the exemption in this constitutional amendment was intended to apply.’ (177 Cal. at p. 545, 171 P. at p. 315.) The court rejected the contention ‘that this phrase must be given a construction which will be broad enough to include those sums which mutual benefit insurance companies annually pay to their insured membership in the form of what has heretofore been known as ‘dividends,’ but which, according to the plaintiffs' contention, is none other than the excess of premiums above the actual cost of insurance which has been prudentially collected from their membership in order to provide against contingent or possible loss during the year, and which, not having been needed or used for such purposes, is returned to them, and hence, under the construction of this phrase in the subdivision of the Constitution under review for which the plaintiffs contend, is returned premiums, and as such are not subject to taxation.' (177 Cal. at p. 542 and pp. 549–550, 171 P. at p. 314.) Subsequently in Mutual Benefit L. Ins. Co. v. Richardson (1923), 192 Cal. 369, 219 P. 1003, the court upheld the view that where earned dividends were credited against gross premiums payable, the net premiums collected would be the measure of the tax. (192 Cal. at pp. 373–375, 219 P. 1003. See also Equitable Life etc. Soc. v. Johnson, supra, 53 Cal.App.2d 49, 75–77, 127 P.2d 95.) As so construed section 1530 complies with the mandate of the Constitution. If it is construed as in the majority opinion, it may founder as conflicting with the constitutional provision which only recognizes true ‘return premiums' as a deduction.

I would therefore affirm the judgment.

FOOTNOTES

1.  The said rule in its entirety reads as follows:‘(f) For the protection of the subscribers, a Reserve Fund shall be maintained equal in the aggregate to the amount to be determined by the Insurance Board. Said Reserve Fund may be maintained by debiting each subscriber, at any time designated by the Executive Committee, with a sum based on a percentage of his annual premium deposit; such percentage to be determined by the Executive Committee and to be uniform in respect of the several subscribers. The Reserve Fund so maintained, including any amounts credited thereto from any other source, shall not be expended or appropriated, in whole or in part, for any other purpose than the purposes herein specified, to-wit: In the discretion of the Executive Committee said Reserve Fund may be applied to the payment of losses and/or expenses and, when expedient and justified by the Burean's financial condition, to the payment of savings to subscribers upon expiration of their policies; provided that the amount of any savings so paid to such subscribers in any one month shall be based on a uniform percentage of their annual premium deposits.’

2.  Unless otherwise indicated all statutory references are to the Insurance Code.

3.  Sections 750 and 763 are made applicable to reciprocal insurersby section 1281.

1.  To be distinguished are sums which might be held as surplus deposits under sections 1399 and 1400 to enable a subscriber to escape liability for assessments. No opinion is expressed as to whether such deposits should be included in taxable ‘gross premiums,’ or whether the return of such deposit would be included in ‘return premiums' as defined in section 14 4/5 of article XIII of the state Constitution.

MOLINARI, Presiding Justice.

BROWN (H.C.), J.*, concurs.