Opinion
Nos. 27151 and 27152
Decided April 26, 1939.
Evidence — Parol evidence admissible to explain Written contract, when — Taxation of intangibles — Single premium life insurance policy — Part of cash allotted to life insurance and part to annuity contract — Divisible insurance and annuity contract.
1. While parol evidence may not be received to contradict or vary the terms of a written instrument as between the parties thereto and those claiming under them, such evidence is admissible when otherwise competent in controversies between strangers to the instrument, or between a stranger and a party thereto.
2. A contract between an insurance company and a person called the assured, whereby, in consideration of a single cash premium paid by the assured to the company, a policy is issued to the assured wherein a part of the single cash premium paid is allotted to life insurance on the life of the assured, and a part of such single cash premium is allotted to an annuity contract, with a guarantee that upon settlement there will be paid to the assured, or in case of his death to his beneficiary, a sum approximately equal to the original cash premium, and in addition a monthly annuity during the life of the assured or until settlement, plus such dividends as may be allotted by the company out of its surplus interest earnings on such contract, is a divisible insurance and annuity contract, the insurance feature of which is exempt from taxation; and when the monthly annuity payments to the assured include both interest or income and a part of the principal sum allotted to the annuity feature of the contract, not separately charged and paid, such monthly installment payments constitute an annuity which is taxable as such.
APPEALS from the Court of Appeals of Franklin county.
During the years 1930 and 1931, Guy C. Bowman, plaintiff in cause No. 27152, appellee herein, and his wife, Cleo S. Bowman, plaintiff in cause No. 27151, appellee herein, separately, for a single premium cash payment in each instance, purchased, from several old line insurance companies, contracts which they separately owned on January 1, 1932. The intangible state tax to be levied against the return arising from such contracts for the year 1932 is the subject of the litigation in these cases.
Since the several contracts taken out by Guy C. Bowman and his wife, Cleo S. Bowman, are identical in type, form and plan of operation, but differ only as to the companies entering into the contracts, the cash amounts paid by the purchaser for the several contracts, the principal amount payable to the purchaser or his beneficiary at his death, and the amount of annuity or income to be paid to the purchaser during life, and since the legal questions and issues involved with reference to each contract and in each case are identical, the court hereafter in this opinion will deal with the facts applicable to one of the contracts owned by Guy C. Bowman, but the decision of the court will apply to the other similar contracts owned by him as well as the contract owned by Cleo S. Bowman which is involved in cause No. 27151.
In November, 1930, Guy C. Bowman purchased policy No. 1557164 from The Penn Mutual Life Insurance Company, paying therefor a single premium of $39,792.90, of which $23,145.45 was allotted to life insurance and $16,647.45 to a life annuity on his life, with a guarantee that he, on settlement, or in case of his death his beneficiary, should be paid the principal sum of $37,898, which is the amount of the purchase price or single premium, less a five per cent "loading" charge, which is provided for in the contract covering agents' commissions and other expenses of putting this business on the books of the company, and a monthly annuity during his life, or until settlement, of $94.75, plus such dividends as may be allotted by the company out of its surplus' interest earnings. The contract was designated as a "Participating Life Income Policy with Principal Sum Payable at Death."
Instead of purchasing two policies or contracts, one a single premium life insurance contract providing that in consideration of the payment of a certain sum at the time of issuance the company would pay a considerably larger sum at the death of the assured to his beneficiary, and the other a single premium straight life annuity contract providing that in consideration of the payment of a single sum at the time of issuance, the company would pay to the annuitant certain specified installments so long as he should live, both of which are common forms of insurance contracts, it is claimed by Bowman that his contract with The Penn Mutual Life Insurance Company combined both these types of contract in one, and provided that the single cash premium paid should be allocated part to life insurance and part to annuity in such proportions as, based upon his age and in accordance with actuarial experience, would constitute a balancing of risk. In other words, under this contract it is claimed the reserve set up for the annuity and that set up for the life insurance would offset each other, the former decreasing and the latter increasing in exact amount as the policy continued. Because of this feature of the contract and of the fact that if there was a settlement before death the insurance feature as well as the annuity feature would be cancelled simultaneously, no medical examination of the assured was required. There are also, in this contract, provisions for loans, surrender value, change of beneficiary and optional methods of payment of income and settlement.
In the year 1931 the company paid to Guy C. Bowman on his alleged annuity, the regular guaranteed monthly installments aggregating $1137 and also the further sum of $663 which was the amount of money allocated by the directors of the company to this contract for the year as its participating share in the earnings of the company as provided for in the contract, making in all a total payment for the year of $1800, which became subject to the state intangible property tax for the year 1932, the determination and amount of which constitute the controversy in this action.
Guy C. Bowman filed his tax return on this contract for the year 1931 but the Tax Commission issued a certificate of amended assessment to him fixing the tax according to its computation. Pursuant to Section 5394, General Code, Bowman filed his appeal to the Tax Commission from the amended assessment. The commission held the appeal was not well taken, dismissed it and made a finding against him for the taxes. Whereupon, under Sections 5611-1 and 5611-2, General Code (107 Ohio Laws, 550, 551), Bowman filed a petition in error in the Common Pleas Court of Franklin county from the Tax Commission and submitted his evidence for the consideration of that court. The taxation of the contract of Cleo S. Bowman had the same history and the two cases were tried together.
As a part of the evidence in these cases the plaintiffs, over the objection of the commission, offered the oral evidence of an actuary of an insurance company concerning the financial structure and operation of the contracts in question including their divisibility as to portions of single premium allotted to insurance and to annuity, and as to the sources from which the annuities are paid. In this connection there was testimony that in each monthly payment of the annuity there is returned to the annuitant a part of the original principal premium allotted to the annuity portion of the contract, part of the payment being income and part of it principal.
The Common Pleas Court reversed the order of the Tax Commission, entered judgment directing that these contracts be assessed according to the claim of the plaintiffs, which judgments were affirmed by the Court of Appeals. The cases are now in this court upon allowance of motions to certify the records.
Mr. James M. Butler and Mr. Sol Morton Isaac, for appellees.
Mr. John W. Bricker, Mr. Herbert S. Duffy and Mr. Thomas J. Herbert, attorneys general, Mr. Ralph J. Bartlett and Mr. Donald J. Hoskins, prosecuting attorneys, Mr. Wm. J. Ford, Mr. J.P. Kearns, Jr., and Mr. Eugene Carlin, for appellants.
The real controversy between the Bowmans and the Tax Commission is whether these contracts are to be considered as life insurance units and annuity units, or are to be considered as contracts of general investment. The plaintiffs claim that each of these contracts is an insurance and annuity contract combined, the insurance part of which is exempt from taxation under Section 5414-10, General Code, while the income yield on the annuity portion is subject to taxation, to be computed as four per cent of one-half of the purchase price of the annuity feature, in accordance with Section 5389, General Code, which section provides for this method of computation of intangible property tax on annuities where the installment payments include both principal and interest, not separately charged and paid. The Tax Commission claims they should be taxed on the basis of five per cent of the aggregate annual payments made to the plaintiffs as the income yield, by virtue of Section 5388, General Code.
There are two identical questions presented in the records of these cases. They are: (1) Did the court err in admitting the oral testimony of the actuary relating to the character, form and operation of the contracts in question, and (2) assuming the facts to be as necessarily found by the Common Pleas Court in determining the issues before it, are the contracts in question divisible into annuity and insurance contracts for the purpose of intangible property tax as claimed by the plaintiffs, and as found by the courts below, or are they single contracts of a general investment character as claimed by the defendant Tax Commission? These problems will be discussed in the order stated.
It is claimed that the parol evidence rule was violated in permitting the actuary to testify regarding these written contracts. It is apparent, however, from the oral testimony given that it did not tend to contradict or vary the terms of the written contracts, but was in explanation of the characteristic features, and the practical operation of the more or less intricate provisions of these contracts, which are common to all contracts of similar type. The understanding of the court as to the computations entering into the plan of these contracts and their practical operation, so far as necessary to classify them for taxation purposes, was undoubtedly aided by this testimony, and its reliability and correctness were not refuted by any rebuttal evidence. The fact that a contract is in written form will not preclude inquiry into the nature of the transaction covered by the instrument. Speyer Co. v. Baker, 59 Ohio St. 11, 25, 51 N.E. 442. The fact that the parties litigant in these cases are each contending for a different interpretation as to the character and effect of these contracts argues that there is some ambiguity in them which would warrant resort to parol explanation. "Extrinsic parol evidence is always admissible to give effect to a written instrument by applying it to its proper subject-matter, by proving the circumstances under which it was made, thereby enabling the court to put itself in the place of the parties, with all the information possessed by them, the better to understand the terms employed in the contract, and to arrive at their intention." 17 Ohio Jurisprudence, 541, Section 444, and cases cited.
While parol evidence may not be received to contradict or vary the terms of a written instrument as between the parties thereto and their privies, such evidence is admissible when otherwise competent in controversies between strangers to the instrument, or between a stranger and a party thereto. Clapp v. Banking Co., 50 Ohio St. 528, 540, 35 N.E. 308. Since strangers to an instrument have not consented to it and have no right or power to reform or set it aside, they are privileged to show by parol evidence that the instrument does not show the real transaction. 22 Corpus Juris, 1292, Section 1725, on this subject, reads:
"The rule excluding parol evidence to vary or contradict a written instrument applies only in controversies between the parties to the instrument and those claiming under them. It has no application in controversies between a party to the instrument on the one hand and a stranger to it on the other, for the stranger not having assented to the contract is not bound by it, and is therefore at liberty when his rights are concerned to show that the written instrument does not express the full or true character of the transaction. And where the stranger to the instrument is thus free to vary or contradict it by parol evidence his adversary, although a party to the instrument, must be equally free to do so. This has been held to be true with reference to writings of all kinds, as for example, deeds; mortgages; leases; bills of sale; contracts of sale; licenses; insurance policies, and contractual receipts."
This was the privilege of the plaintiffs in these cases, and the privilege was likewise open to the defendants. It is the opinion of the court that there was no error in the admission of the testimony in question.
The principal controversy is whether the contracts in question are single contracts with combined insurance and annuity features. The defendant commission claims that they are not, but are pure investment contracts; that the monthly installment payments provided for constitute income on the entire cash premium paid by the owners, which cash premium less loading charges is to be paid back by the companies at the death of such owners, or at any time they see fit to demand a settlement; and that there is actually no element of risk or insurance, or annuity features, in these contracts.
In support of this contention the commission cites two cases, State, ex rel. Thornton, v. Probate Court of Ramsey County, 186 Minn. 351, 243 N.W. 389, and Ballou v. Fisher, 154 Ore., 548, 61 P.2d 423. The first of the above named cases involves the determination of the state inheritance or succession tax on the lump sum payable on a similar contract to the beneficiaries of the owner at his death, the claim being made by the beneficiary that the contract was one of insurance and, therefore, not taxable under the laws of Minnesota, while the state claimed, and the court held, that the money paid in by the owner was a deposit or investment, returnable at his death, and became part of his estate and, therefore, taxable as such. That case, however, lacks authoritative value for the reason that it was submitted on an agreed statement of facts, a partial summary of which is given by the court in its opinion wherein it says: "The policy contracts here involved are not what are ordinarily known as annuity contracts, in which a definite annual sum is to be paid the annuitant during his life or the life of some other person named in the contract, and in which such annual payments absorb portions of the principal." According to the records in the cases at bar there is some absorption of principal allotted to the annuity in these contracts, through and by virtue of the payment of the monthly annuity installments.
The Ballou case involves the determination of the intangible taxes due on a similar contract under the Oregon intangible tax law, under which law there is a specific exemption from taxation of the "amounts received by the insured as a return of premium or premiums paid by him under life insurance, endowment, annuity, inter-insurance or reciprocal contracts, either during the term of the contract or at maturity," etc., the remainder of the installment payments being subject to the tax. This statute provides a different plan of taxation of annuities from that provided under the laws of Ohio. The tax laws of Ohio do not attempt to segregate and tax income as distinguished from a combination of income and principal where the periodical installment payments include both principal and interest not separately charged and paid, but do provide a method of taxation where there is such a combination of return in the installment payments which are classed as annuities. The Oregon court holds that the payments to the insured were taxable income, and cites the Thornton case, above mentioned, as the basis for its holding.
In the opinion of this court, the Tax Commission, as an arm of the state, is not in position to claim that the contracts involved in the cases at bar are not insurance or annuity contracts. Section 665, General Code, provides that "No company * * * whether organized in this state or elsewhere, shall engage either directly or indirectly in this state in the business of insurance, or enter into any contracts substantially amounting to insurance, or in any manner aid therein * * * unless it is expressly authorized by the laws of this state, and the laws regulating it and applicable thereto, have been complied with"; Section 9385, General Code, provides that "No company * * * organized or incorporated * * * under the laws of this or any other state of the United States * * * transacting the business of life insurance in this state, shall be permitted or allowed to take any kind of risks, except those connected with, or appertaining to making insurance on life or against accidents to persons, or sickness, temporary or permanent physical disability, and granting, purchasing and disposing of annuities; nor shall the business of life insurance, or life and accident insurance, in this state, be in any wise conducted or transacted by any company * * * which in this state * * * does a banking or any other kind of business in connection with insurance"; and, finally, Section 646, General Code, provides that, upon the filing of its annual statement, the Superintendent of Insurance shall issue to each insurance company authorized to do business in this state, a certificate that it has complied with the laws of this state, all of which means that unless the companies making the contracts involved in these cases are insurance companies as claimed by the commission, and unless these contracts are insurance or annuity contracts, they have no right or authority under the laws of Ohio to enter into the contracts in question. In other words, if they are insurance companies admitted to do insurance business in the state of Ohio, they are violating the law in entering into these contracts, if such contracts are of the character claimed by the commission, namely, deposit or investment contracts.
There is no presumption that in making these contracts these companies are law violators. If such were the case the state of Ohio would be attacking them by quo warranto, rather than permitting them to make such contracts and tacitly recognizing their validity by attempting to collect taxes on the income arising therefrom. Under the circumstances, the commission cannot consistently claim that these contracts are other than insurance or annuity contracts or both.
Taxation on property in Ohio is provided only by statute. All tax laws as well as the application of such laws are to be construed strictly against the state. Cassidy v. Ellerhorst, 110 Ohio St. 535, 144 N.E. 252, 42 A. L. R., 372. 38 Ohio Jurisprudence, 725, Section 15, reads: "The intention to tax must be expressed in distinct and unambiguous language, as the language employed cannot be extended by implication beyond its clear import. If there is any doubt as to the meaning of a tax statute, the construction must be strict, and the doubt must be resolved in favor of the citizen upon whom or property upon which the burden is sought to be imposed, and against the taxing power. Language employed in a taxation statute should not be extended by implication beyond its clear import, or so enlarged in its operation as to embrace subjects of taxation not specifically named. Courts will not by construction interpolate words into the statute to extend its terms."
Insurance as an item of property, under the legislative policy of this state, has been given, generally, a preferential status in exemption from taxation. This policy is not an accident, but has doubtless been adopted to encourage savings and thrift on the part of the people to provide for future needs, and to encourage the circulation of surplus wealth in business enterprise. It must be conceded that if the contract provisions contained in the policy of The Penn Mutual Life Insurance Company hereinbefore described and which are involved in the litigation in these cases, had been embodied in two separate contracts, one for life insurance with a single cash premium of $23,145.45 and the other for a life annuity with a single cash premium of $16,647.45, with the installment payments to be made on the annuity contract as in the policy provided, the guaranteed principal sum to be paid only at the death of Guy C. Bowman, there could be no question that the installment payments would be annuity pure and simple, and taxable as such; and if each of the two contracts had carried conditions to the effect that if the cancellation of and settlement under such contracts were made by the assured before his death, such cancellation and settlement should apply to both contracts simultaneously there would not be, in the opinion of the court, much ground to claim that the installments paid on the annuity contract, up to the time of settlement, were other than annuity payments, and yet in such case the contractual effect of such two policies would be identical with that of the dual-form contracts which are involved in this controversy.
The same result would seem to follow in case both the insurance and annuity features are combined in a single divisible contract, where the portion of the single premium allotted to insurance is allowed to accumulate and create an undistributed reserve, while the premium allotted to the annuity contract with its income is paid out to the owner in installments which not only include the income but a portion of the principal sum originally paid for the annuity, not separately charged and prod, as is shown by the undisputed evidence to occur in the operation of these contracts.
The complaint of the commission as to the interpretation placed upon these contracts by the plaintiffs is that there is in this type of contract such a balancing of risk that there is in fact no risk whatever involved, and, therefore, no element of insurance in the contract. In answer, it may be said that all insurance involves a balancing of risk although it is usually accomplished by spreading the risk and coverage over the lives of a large number of persons so as to insure the proper actuarial average and thus neutralize the risk. There can be slight difference where the balancing of risk is accomplished by two contracts or a single divisible one.
Furthermore, under modern practice, insurance contracts contain many so-called investment features in connection with the primary insurance feature, but these are only incidental and do not make them deposit or investment contracts.
Under the terms of the contracts in question, and considering the plan of operation and the source of the monthly disbursements made to the owners as shown by the record, the court is of the opinion that such monthly installments constitute annuity payments and are taxable as such.
The judgments of the Court of Appeals are affirmed.
Judgments affirmed.
DAY, WILLIAMS and MATTHIAS, JJ., coucur.
We can see nothing here but an ingenious device appearing on its face to constitute two distinct units — one of insurance with an annuity feature and the other of investment, but which is in reality no more than a contract of general investment, and taxable as such in accordance with the contention of the Tax Commission.
WEYGANDT, C.J., and MYERS, J., concur in the foregoing dissent.