Honorable %alter C. Woodward, Chairman
Board of Insuranoe Cnrnoissioners
Austin, Texas

bar   Sirr

                                    Opinion No. O-2265
                                    Re: Construction of Artiale 4769,
                                         Revised Civil Statutes of
                                         Texas, 1925.

        This will acknowledge reoeipt of your letter of April 16, 1940,
in which YOU seek the opinion of this Department on the questions there-
in presented. We deem it essential to set out your letter in full
except for the following parts thereof. It iar

        "Mutual life insuranas companies generally, and certain
   hook life insurance companies, issue in this and in other
   state policy oontraots providing for a partioipation on the 'part
   of the insured in the profits of the company. The participation
   provided is usually in the form of dividends as apportioned and
   deolard by the Board of Directors of the company from the profits
   of the business. The usual dividend provisions contained in
   polioy contracts grant four options to the insured for the
   disposition of suoh dividends to whioh he may become entitled.
   These are (1) payable to the insured in cash, (2) applied to
   pay renewal premiums under the contra&, (3) used to purohase
   additional insuranoe at net premium rates, and (4) left with
   the aompany to aooumulate at interest.

       'Foreign life insurance compmies operating in the State
  of Texas are taxed on thej~rgross premium receipts in acoordanoe
  with the provisions of Article 4769, Chapter 4, Title 70,
  Revised Civil Statutes of 1925, as amended by House Bill 6.
  Chapter 495, Artiole IV, Srd Called Session, Forty-fourth
  Legislature, 1936, as amended Acts 1937 Forty-fifth Legis-
  lature, Rouse Bill 441. Article 4769 provides in part 'Each
  life insurance company not organized under the laws of this
  State, transacting business in this Stats, shall annually, on
  or before the 1st day of Maroh, make a report to the Comnis-
  sioner, which report shall bs sworn to by either the president
  or vice president and secretary or treasurer of suoh company,
  which shall show the g ross aroomrtof premium collected during
  the year ending on Decomber 31st, preceding, fron citizens of
                                                                       -’   .




Honorable Walter C. Woodward, Page 2             O-2265



  this Stats upon policies of insurance. Some years ago this
  Department interpreted 'gross amount of premiums collected'
  to msan the total amount of premiums specified in the poliay
  contract, without deduction for any dividends paid or appljed,
  and attempted to collect taxes on dividends applied under the
  third option referred to above.

       "The State Life Insuranoe Company of Indiana instituted
  a suit against R. L. Daniel, Commissioner of Insurance of the
  State of Texas, to recover certain taxes it had paid under
  protest, and in a decision rendered by the Distriot Court of
  the United States for the Western District of Texas, Austin
  Division, on June 15, 1936, adjudged that the Stats Life
  Insurance Company was entitled to a refund of the taxes it
  had paid under protest, together with interest.

       "In the Plaintiff's Seoond Amended Original Petition
  it was stated *Plaintiff alleges that the sole issue in this
  case is whether a dividend pursuant to a request theretofore
  made, which,is automatically converted into additional in-
  surance under the dividend option of the respective policies
  issued to policy-holders, residents of the State of Texas;
  which acts of conversion take place in the Stats of Indiana,
  and ars not moneys collected from citizens of Texas, are the
  lawful subjeot-matter of the aforesaid Texas Statutes imposing
  a tax upon 'the gross amount of premiums collected' from
  citizens of Texas.

        "Following this decision it was the then opinion of this
   Department that all dividends paid by such companies ware
   thereafter deductible from taxable income. Inasmuch as the
  decision rendered was apparently based upon the Plaintiff's
   Second Amended Original Petition and upon the agreement as
   to certain facts, ns ars now questioning the interpretation
   which ws have heretofore made, and inasmuch as a considerable
   amount of money is involved this matter is being suhnitted
   to you for your consideration. In the event that we allow as
   deduotion form taxable income only those dividends applied to
   purchase additional insuranae there will, undoubtedly, ensue
   law suits from various companies. If ma allow as a deduation
   all dividends paid ne may be granting a deduotion not contem-
   plated by our lam, and the State of Texas therefore would
   necessarily be losing certain taxes to which it is entitled.

        * we ars enclosing copies of the Plaintiff's Second
   Amended Original Petition in the case of State Life Insuranas
   Company vs. R. L. Daniel, the agreement as to aertain Pa&S
   in the sama ease, and judgment as rendered by the court. TFs
   are also snolosing a copy of a memorandum furnished us by the
   General Counsel for the Prudential InStranCe  Company of America,
Honorabls Walter C. Woodward, Page 3            O-2266



  and your opinion is respectfully requested as to whether or not,
  first, dividends payable in cash; secon,d,applied to pay renewal
  premiums, and: third, left with the company at interest, should
  be allowed as a deduction from taxable premium income."

        Article 4769 of the Revised Civil'Statutes of Texas, 1925, levies
a tax upon foreign life insurance companies doing business in Texas. The
pertinent parts of said Article ares

       "Each life insurance company not organized under the laws
  of this State, transaoting business in this State, shall
  annually, on or before the 1st day of arch, make a report to
  the Commissioner, which report shall be sworn to by either the
  president or vice president and secretary or treasurer of such
  company, which shall show the gross amount of premiums collected
  during the year ending on December 31st. preceding, from citisens
  of this Stats upon policies of insurance. 0 0 . ." (ilnderscoring
  ours.)

        The above Article was last amended by dots of 1937, 45th Legis-
lature, p. 525, Ch. 258, para. lb.

        Article 7064 of the Revised Civil Statutes of 1925 found in
Chapter 2, Title 122, dealing with taxes based upon grcss receipts,
levies a tax upon insurance companies other than life companies. The
pertinent parts ares

       "Svsry insurance corporation, Lloyd's, or reciprocals,
  and any other organieation or concern transacting the business
  of fire, marine, marine inland, accident credit, title live-
  stock, fidelity, guaranty, surety, casualty, or any other kind
  or character, or insurance business other than the business of
  life insurance, and other fraternal benefit associations, within
  this State at the time of filing its annual statemsnt, shall
  report,to the Board of Insurance Commissioners the gross amount
  of premiums received upon property located in this State or on
  risks located in this State or on risks located in this State
  during the preceding year, and each of such insurance carriers
  shall pay an annual tax upon such gross premium receipts as
  follcwst shall pay a tax of three and twenty-five one hundredths
  (3.28) per cent, provided, that any such insurance carriers
  doing two (2) or more kinds of insurance business herein referred
  to shall pay the tax herein levied upon its gross premiums
  received from each of said kinds of business; and the gross
  premiums receipts where referred to in this lam shall be the
  total gross amount of premiums received on each and every kind
  of insurance or risk written, exscpt premiums received from
  other licensed oompanies for reinsurance, less return premiums
  and dividends paid policyholders, but there shall be no deductiLen
  for prsmiums paid for reinsuranoe. . 0" (Underscoring ours)
Honorable Walter C. Wocdnard, Page 4             O-2266



        This Article was likerise amended by Acts of 1937, supra. It
was again amended by House Bill 666, Acts 1939, 46th Legislature, in a
respect with which we are not here ooncerned.

        Article i064a of the Revised Civil Statutes of Texas levivsa tax
upon domestic life insuranoe companies, sooieties, and associations. It
was likewise amended by Acts of 1937, supra, and again by House Bill 556,
supra. Ifeare not here ooncerned with the latter amendment.

        A review of the above mentioned statutes as they appear in Vernon's
Annotated Statutes reflects this situation% Article 7064 refers to and
fully defines "gross premiums." Articles 7064a and 4769 refer to gross
premiums, but do not attempt to define the same.

        House Bill 441, Acts of 1937, 45th Legislature, p. 525, Ch. 256,
above referred to, is a comprehensive sot designed to clarify the Articles
levying taxes against insurance companies. Section 1 thereof amends
Article 7064.   Section la repeals an existing statute with which ws ars
not here ooncemed.   Section lb amends Artiale 7064a.   Section lc amends
Article 4769.

        Section lb, amending Article 7064, contains the language "... and
the gross receipts where referred to in this law shall be the total gross
amount of premiums received on each and every kind of insuranae or risk
written. . . less return premiums and dividends paid policy-holders...."
(Underscoring ours).

         Ws believe that the words "in this law" oontained in the above
definition would neoessarily make such definition applicable not only to
Section 1, but to Sections lb and lo as well. This being true, Articles
7064a and 4769 should be so construed as to contain the same definition
as .nom appears in Article 7064.

        There ars many decisions in other jurisdictions tending to sup-
port the proposition that even in the absence of definition by the
Legislature, the term "gross premiums" would be ncnstrued so as to ex-
olude premiums returned to pclioyholders in the form of dividends.
See State v. Wilson, 172 Pac. 41 (Sup. Ct. Kan.) and Penn Mutual v.
Insurance Ccmmissioner, 70 So. 462 (Sup. Ct. Miss.) Ravin,~oonstrued
the above Article so as to include such definition, it is however, un-
necessary to rely upon these authorities.

        We have likerise carefully considered the pleadings and judgment
in the case of the State Life Insurance Cc. V~ R. L. Daniels, Commissioner
of Insurance of the Stats of Texas, et al, cause No. 1359 at law, tried
in the District Court of the United States for the Western District of
Texas, Austin Division. Article 4769 was hers involved and the court
eonoluded that the company had the right to deduot from their gross
premiums dividends .whichwsre automatically converted into additional
insnranoe by virtue of an option in favor of the policyholders. The
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         Honorable Walter C. Woodward, Page 5                O-2265




         specific questions submitted by you were nof directly before the court
         in this case, but we can conceive of no difference b&wean a policyholder
         converting his dividends into additional insurance and from using the
         same to pay renewal premiums, accepting the same in cash, or loaning such
         dividends to the company at interest.

                 For all the reasons herein given, it is our opinion that all your
         qUeStiOnS should bs ansmtred in the affirmative to the effect that divi-
         dends, whether payable in cash, applied to renewal premiums, used to
         purchase additional insurance, or loaned to the company at interest should
         be allcwsd as deductions form taxable premium inoome.

                 All papers in connection with the Stats Life Insurance Company
         case, submitted with your request, are returned herewith.

                                                           Yours very truly

                                                      ATTORi'EYGE!GXRALOF TEX4S


                                                      By    s/Lloyd Armstrong
                                                                    Assistant

         WrBBB:wc


         ENCLOSURES


         APPRGVED MAY 21, 1940
         s/Gsrald C. Mann
         ATTORNEY GENERAL OF TEXAS

         Approved Opinion Committee By RWF Chairman
